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D R A F T

FOR DISCUSSION ONLY

UNIFORM COMMERCIAL CODE

REVISED ARTICLE 1 GENERAL PROVISIONS (199__)

April 1997 Draft

THE AMERICAN LAW INSTITUTE

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

THE AMERICAN LAW INSTITUTE

and

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

The ideas and conclusions herein set forth, including drafts of proposed legislation, have not been passed on

by The American Law Institute or the National Conference of Commissioners on Uniform State Laws. They do

not necessarily reflect the views of the Committee, Reporters or Commissioners. Proposed statutory language,

if any, may not be used to ascertain legislative meaning of any promulgated final law.

UNIFORM COMMERCIAL CODE

REVISED ARTICLE 1

GENERAL PROVISIONS

APRIL 1997

Reporters Prefatory Comments iv

PART 1

TITLE, CONSTRUCTION, APPLICATION, AND SUBJECT MATTER OF

THE ACT

Section 1-101. Short Title.

Section 1-102. Construction of Act to Promote Its

Purposes and Policies; Applicability

of Supplemental Principles of Law.

Section 1-103. [Deleted].

Section 1-104. Applicability of [Act] by Agreement.

Section 1-105. Construction Against Implicit Repeal.

Section 1-106. Severability.

Section 1-107. Section Captions; Use of Particular

Gender

PART 2

GENERAL DEFINITIONS AND PRINCIPLES OF INTERPRETATION

Section 1-201. General Definitions.

Section 1-202. Notice; Knowledge

Section 1-203. Distinguishing Leases from Security

Interests

Section 1-204. Value.

Section 1-205. Reasonable Time; Seasonableness

PART 3

SCOPE, TERRITORIAL APPLICABILITY, AND GENERAL RULES

Section 1-301. Scope.

Section 1-302. Territorial Application of the Act;

Parties Power to Choose Applicable

Law.

Section 1-303. Variation by Agreement.

Section 1-304. Course of Performance, Course of

Dealing, and Usage of Trade.

Section 1-305. Obligation of Good Faith.

Section 1-306. Unconscionable Contract or Term.

Section 1-307. Statute of Frauds for Personal

Property Not Otherwise Covered

Section 1-308. Remedies to be Liberally Administered

Section 1-309. Waiver or Renunciation of Claim or

Right After Breach.

Section 1-310. Prima Facie Evidence By Third Party

Documents.

Section 1-311. Performance or Acceptance Under

Reservation of Rights.

Section 1-312. Option to Accelerate at Will.

Section 1-313. Subordinated Obligations.

UNIFORM COMMERCIAL CODE

REVISED ARTICLE 1 GENERAL PROVISIONS

REPORTERS PREFATORY COMMENTS

I. Introduction

This document is the second complete draft of Phase One of the

tasks before this Drafting Committee preparation of Revised

Article 1 of the Uniform Commercial Code. It consists of the full

text of the proposed Article, revised in light of (i) the decisions

of the Drafting Committee at its last meeting and (ii) the

recommendations of the NCCUSL Style Committee. After each section

is a brief explanation of changes made since the February Draft.

It is anticipated that this draft, with explanatory comments

reinserted, will be the draft discussed at this summers NCCUSL

meeting.

II. Issues Raised by this Draft

While this draft essentially memorializes decisions made at

the last meeting of the Drafting Committee, there are a few issues

that the Drafting Committee should consider at its April meeting.

A. Applicability of Supplemental Principles of Law

This draft, at the suggestion of the Drafting Committee,

merges former sections 1-102 and 1-103 into revised section 1-102,

and states a somewhat more preemptive view of the relationship

between the Uniform Commercial Code and other law than does current

section 1-103. Does this section strike the appropriate balance?

B. Definition of Good Faith

Current section 1-201(19) defines good faith as honesty in

fact. Articles 2, 2A, 2B, 3, 4, 8, and 9, however, have adopted

a broader standard that also incorporates the observance of

reasonable commercial standards of fair dealing. Article 5, on the

other hand, has retained the narrower test. The matter has not

been addressed in Articles 6 and 7. At the last meeting of the

Drafting Committee, it was decided that there would be no

definition of good faith unique to Article 1. Yet, because the

term good faith is used in Article 1, as well as in Articles 6

and 7, a definition for those uses must be articulated. Three

alternative versions of section 1-201(22) are presented.

C. Definition of Holder

The current definition of holder is awkward and difficult to

understand without knowing its meaning in advance. Is the slightly

reorganized definition of holder in section 1-201(23) appropriate?

D. Notice and Knowledge

At the suggestion of the Style Committee, the rules concerning

notice and knowledge have been moved from section 1-201 to a

separate section section 1-202. Does section 1-202 appropriately

capture the concept? Will unnecessary confusion be caused by this

reorganization?

D. Definition of Security Interest

At the Suggestion of the Style Committee, that portion of the

definition of security interest that distinguishes true leases

from security interests has been moved to a separate section. Does

the remaining portion of the definition suffice as a stand-alone

provision? Does the new section on distinguishing leases from

security interests section 1-203 work well as a separate

section?

E. Choice of Law

1. By agreement

Does section 1-302(a), which governs the effect of the

parties agreement as to the governing law, accurately reflect the

decisions of the Drafting Committee as to the limits on party

autonomy in non-consumer cases? In particular, is the public

policy exception articulated appropriately? Is the requirement

that the transaction bear a reasonable relationship to a country

other than the United States before the parties can designate the

law of another country articulated appropriately?

2. In the absence of agreement

Should the bracketed language in section 1-302(b), which

overrides general choice of law principles if the forum state would

select a jurisdiction whose law would render all or part of an

agreement unenforceable when the forums own law would enforce the

agreement, be retained?

F. Obligation of Good Faith

The articulation of this obligation has been slightly reworked

at the suggestion of the Drafting Committee. Does the

rearticulation capture the concept?

PART 1

TITLE, CONSTRUCTION, APPLICATION AND SUBJECT MATTER OF THE ACT

SECTION 1101. SHORT TITLE.

(a) This [Act] may be cited as the Uniform Commercial Code.

(b) This Article may be cited as Uniform Commercial Code

General Provisions.

Changes From February 1997 Draft

No substantive changes. Minor stylistic changes suggested by

Drafting Committee or Style Committee.

SECTION 1102. CONSTRUCTION OF ACT TO PROMOTE ITS PURPOSES AND

POLICIES; APPLICABILITY OF SUPPLEMENTAL PRINCIPLES OF LAW.

(a) This [Act] shall be liberally construed and applied to

promote its underlying purposes and policies, which are:

(1) to simplify, clarify, and modernize the law governing

commercial transactions;

(2) to permit the continued expansion of commercial

practices through custom, usage and agreement of the parties; and

(3) to make uniform the law among the various

jurisdictions.

(b) Principles of law and equity may be utilized to

supplement this [Act], except to the extent that those principles

are inconsistent with

(1) either the terms or the purposes and policies of

particular provisions of this [Act]; or

(2) the purposes and policies identified in

subsection (a).

Revision Notes

This section is a merger of sections 1-102 and 1-103 from the

February 1997 Draft, as suggested by the Drafting Committee.

Subsection (a) is section 1-102 of the February 1997 Draft, with

stylistic changes suggested by the Style Committee. Subsection (b)

is based on Section 1-103 of the February 1997 Draft, and reflects

a strengthening of the preemptive nature of the Uniform Commercial

Code as suggested by the Drafting Committee.

SECTION 1-103. [DELETED]

Changes From February 1997 Draft

Section 1-103 of the February 1997 Draft has been reformulated

as Section 1-102(b).

SECTION 1-104. APPLICABILITY OF [ACT] BY AGREEMENT.

(a) To the extent that a transaction is not subject to this

[Act], parties to the transaction may, subject to subsection (b),

provide by agreement that one or more of the provisions of this

[Act] determine any or all of their rights and obligations with

respect to each other.

(b) An agreement described in subsection (a) is ineffective

to vary a rule that, under the law that would otherwise apply to

the transaction, is not variable by agreement.

Changes From February 1997 Draft

No substantive changes. Minor stylistic changes suggested by

Drafting Committee or Style Committee.

SECTION 1105. CONSTRUCTION AGAINST IMPLICIT REPEAL. This [Act]

is a general act intended as a unified coverage of its subject

matter. No part of this [Act] is to be construed as having been

implicitly repealed by subsequent legislation if this construction

reasonably can be avoided.

Changes From February 1997 Draft

No substantive changes. Minor stylistic changes suggested by

Drafting Committee or Style Committee.

SECTION 1106. SEVERABILITY. If a provision of this [Act], or

an application thereof to any person or circumstances, is held

invalid, the invalidity does not affect other provisions or

applications of the [Act] that can be given effect without the

invalid provision or application, and to this end the provisions of

this [Act] are severable.

Changes From February 1997 Draft

No substantive changes. Minor stylistic changes suggested by

Drafting Committee or Style Committee.

SECTION 1-107. SECTION CAPTIONS; USE OF PARTICULAR GENDER

(a) Section captions are parts of this [Act].

(b) In this [Act], unless the context otherwise requires:

(1) words in the singular number include the plural, and

in the plural include the singular;

(2) words of any gender also refer to any other gender.

Subsection (b) is identical to current UCC section 1-102(5).

Changes From February 1997 Draft

No substantive changes. Minor stylistic changes suggested by

Drafting Committee or Style Committee.

PART 2

GENERAL DEFINITIONS AND PRINCIPLES OF INTERPRETATION

SECTION 1201. GENERAL DEFINITIONS. Subject to additional

definitions contained in the subsequent Articles of this [Act] that

are applicable to specific Articles or Parts thereof, and unless

the context otherwise requires, in this [Act]:

(1) Action, in the sense of a judicial proceeding,

includes recoupment, counterclaim, set-off, suit in equity, and any

other proceeding in which rights are determined.

(2) Aggrieved party means a party entitled to resort to a

remedy.

(3) Agreement means the bargain of the parties in fact, as

found in their language or inferred from other circumstances

including course of dealing, usage of trade, or course of

performance as provided in this [Act]. The legal consequences of

an agreement are determined by the provisions of this [Act], if

applicable, or, otherwise, by the law of contracts.

(4) Authenticate means to sign or to execute or adopt a

symbol, including a digital signal or identifier, or to do an act

that encrypts a record or an electronic message in whole or in

part, with present intention to establish the authenticity of, or

signify a partys acceptance and adoption of, a record or term that

contains the authentication or to which a record containing the

authentication refers.

(5) Bank, except as provided in Articles 3, 4, 4A, and 5,

means any person engaged in the business of banking.

(6) Bearer means the person in possession of a negotiable

instrument, document of title, or certificated security that is

payable to bearer or indorsed in blank.

(7) Bill of lading means a record evidencing the receipt

of goods for shipment issued by a person engaged in the business of

transporting or forwarding goods.

(8) Branch includes a separately incorporated foreign

branch of a bank.

(9) Burden of establishing a fact means the burden of

persuading the trier of fact that the existence of the fact is more

probable than its non-existence.

(10) Buyer in ordinary course of business means a person

that buys goods in good faith, without knowledge that the sale

violates the rights of another person in the goods, and in the

ordinary course from a person, other than a pawnbroker, in the

business of selling goods of that kind. A person buys goods in the

ordinary course if the sale to the person comports with the usual

or customary practices in the kind of business in which the seller

is engaged or with the sellers own usual or customary practices.

A person that sells minerals or the like, including oil and gas, at

the wellhead or minehead is a person in the business of selling

goods of that kind. A buyer in ordinary course of business may buy

for cash, by exchange of other property, or on secured or unsecured

credit, and may acquire goods or documents of title under a pre-

existing contract for sale. Only a buyer that takes possession of

the goods or has a right to recover the goods from the seller

(Section [2-xxx]) may be a buyer in ordinary course of business.

A person that acquires goods in a transfer in bulk or as security

for or in total or partial satisfaction of a money debt is not a

buyer in ordinary course of business.

(11) Conspicuous means so displayed or presented that a

reasonable person against whom it is to operate would likely have

noticed it. Whether a term or clause is conspicuous is for

decision by the court. The following are conspicuous:

[insert list from latest draft of Article 2, 2A, or 2B]

(12) Contract means the total legal obligation that

results from the parties agreement as determined by this [Act] and

by any other applicable laws.

(13) Creditor includes general creditor, secured party or

other secured creditor, lien creditor and any representative of

creditors, including an assignee for the benefit of creditors,

trustee in bankruptcy, receiver in equity, and executor or

administrator of an insolvent debtors or assignors estate.

(14) Defendant includes a person in the position of

defendant in a cross-action or counterclaim.

(15) Delivery, with respect to an instrument, document of

title, or chattel paper, means voluntary transfer of possession.

(16) Document of title means record that in the regular

course of business or financing is treated as adequately evidencing

that the person in possession of it is entitled to receive, hold

and dispose of the record and the goods it covers, including a bill

of lading, dock warrant, dock receipt, warehouse receipt, or order

for the delivery of goods contained in a record that purports to be

issued by or addressed to a bailee and purport to cover goods in

the bailee's possession which are either identified or are fungible

portions of an identified mass.

(17) Electronic agent means a computer program or similar

device designed, selected, or programmed by a party to initiate or

respond to electronic messages or performances without review by an

individual.

(18) Electronic message means a record stored, generated,

or transmitted for purposes of communication to another party or an

electronic agent by electronic, optical scanner, or similar means.

The term includes electronic data interchange, electronic mail,

facsimile, telex, telecopying, and similar communication.

(19) Fault means a wrongful act, omission, or breach.

(20) Fungible goods are goods of which any unit is, by

nature or usage of trade, the equivalent of any other like unit.

Goods that are not fungible are deemed fungible for the purposes of

this [Act] to the extent that, under a particular agreement or

document, unlike units are treated as equivalents.

[(21) Genuine means free of forgery or counterfeiting.]

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SECTION 1-201(22) ALTERNATIVE A

[DELETED]

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SECTION 1-201(22) ALTERNATIVE B

(22) Good faith, as used in this Article with respect to a

particular transaction, has the same meaning as good faith in the

Article of this [Act] that governs the transaction.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SECTION 1-201(22) ALTERNATIVE C

(22) Good faith, except with respect to letters of credit,

means honesty in fact and the observance of reasonable commercial

standards of fair dealing.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(23) Holder,

(i) with respect to a negotiable instrument, means the

person in possession of the negotiable instrument if it is

(A) payable to bearer or

(B) payable to an identified person who is the person

in possession;

(ii) with respect to a document of title, means the

person in possession of it if the goods are deliverable to bearer

or to the order of the person in possession.

(24) Insolvency proceeding includes an assignment for the

benefit of creditors or other proceeding intended to liquidate or

rehabilitate the estate of the person involved.

(25) Insolvent means either

(a) having ceased to pay debts in the ordinary course of

business other than as a result of a bona fide dispute as to those

debts;

(b) unable to pay debts as they become due; or

bankruptcy law.

(26) Money means a medium of exchange authorized or

adopted by a domestic or foreign government and includes a monetary

unit of account established by an intergovernmental organization or

by agreement between two or more countries.

(27) Organization means a person other than an individual.

(28) Party, as distinct from third party, means a person

who has engaged in a transaction or made an agreement within this

[Act].

(29) Person means an individual, corporation, business

trust, estate, trust, partnership, association, joint venture,

government, government subdivision or agency or instrumentality, or

any other legal or commercial entity.

(30) Present value means the amount as of a date certain

of one or more sums payable in the future, discounted to the date

certain. The discount is determined by the interest rate specified

by the parties if the rate is not manifestly unreasonable at the

time the transaction is entered into; otherwise, the discount is

determined by a commercially reasonable rate that takes into

account the facts and circumstances of each case at the time the

transaction was entered into.

(31) Presumption or presumed means that the trier of

fact must find the existence of the fact presumed unless and until

evidence is introduced which would support a finding of its

nonexistence.

(32) Purchase means taking by sale, lease, discount,

negotiation, mortgage, pledge, lien, security interest, issue or

re-issue, gift, or any other voluntary transaction creating an

interest in property.

(33) Purchaser means a person that takes by purchase.

(34) Record means information that is inscribed on a

tangible medium or that is stored in an electronic or other medium

and is retrievable in perceivable form.

(35) Remedy means a remedial right to which an aggrieved

party is entitled with or without resort to a tribunal.

(36) Representative means any person empowered to act for

another including an agent, an officer of a corporation or

association, and a trustee, executor, or administrator of an

estate.

(37) Rights includes remedies.

(38) Security interest means an interest in personal

property or fixtures that secures payment or performance of an

obligation. The term also includes any interest of a consignor and

a buyer of accounts, chattel paper, or a payment intangible in a

transaction that is subject to Article 9. The special property

interest of a buyer of goods on identification of those goods to a

contract for sale under Section 2-xxx is not a security interest,

but a buyer may also acquire a security interest by complying

with Article 9. The retention or reservation of title by a seller

of goods notwithstanding shipment or delivery to the buyer (Section

2xxx) is limited in effect to a reservation of a security

interest.

(39) Send in connection with a writing, record, or notice

means to

(i) deposit in the mail properly addressed and, in the

case of an instrument, to an address specified thereon or otherwise

agreed, or, if there is none, to any address reasonable under the

circumstances;

(ii) transmit by any other usual means of communication

in a form reasonable under the circumstances;

(iii) deliver for such transmission with postage or other

cost of transmission provided for.

The receipt of any record or notice within the time at which it

would have arrived if properly sent has the effect of a proper

sending.

(40) Signed includes any symbol executed or adopted by a

party with a present intent to authenticate a writing.

(41) State means a State of the United States, the District

of Columbia, Puerto Rico, the United States Virgin Islands, or any

territory or insular possession subject to the jurisdiction of the

United States.

(42) Surety includes a guarantor or other secondary

obligor.

(43) Term means a portion of an agreement that relates to

a particular matter.

(44) Unauthorized signature means a signature made without

actual, implied, or apparent authority. The term includes a

forgery.

(45) Warehouse receipt means a receipt issued by a person

engaged in the business of storing goods for hire.

(46) Written or writing includes printing, typewriting,

or any other intentional reduction to tangible form.

Changes From February 1997 Draft

Minor stylistic changes throughout as suggested by Drafting

Committee or Style Committee. Renumbering as a result of moving

some provisions to other sections. In addition:

Airbill. Deleted.

Bank. Inasmuch as Articles 3, 4, and 4A contain their own

definitions of bank, this definition has limited utility. The

term is used sporadically in Article 2 and Article 9. This would

seem to be a possible candidate for harmonization.

Conspicuous. A safe harbor will be added, based on the latest

drafts of Articles 2, 2A, and 2B.

Delivery. The reference to certificated securities has been

deleted because Article 8 conains its own definition of delivery.

Fungible. The reference to securities has been deleted because

Article 8 no longer uses the term fungible to describe

securities.

Good faith. At the February-March meeting of the Drafting

Committee, it was decided that there would be no unique Article 1

definition of good faith. The sentiment of the Drafting

Committee seemed to be that the Article 1 definition should simply

be deleted. This is reflected in Alternative A. There is a

problem with this formulation, though the term good faith is

used in Article 1 and failing to define it in Article 1 would leave

those uses of the term without a definition. Accordingly,

Alternatives B and C are presented as possible solutions.

Alternative B provides that, as used in Article 1, good faith

gets it meaning from the definition of the term in the substantive

Article that governs the transaction. This would cause a problem

in Articles 6 and 7, which do not contain definitions of good

faith. Accordingly, Alternative C is provided. That alternative

states that good faith means both honesty and the observance of

reasonable commercial standards of fair dealing, except with

respect to letters of credit.

Holder. Reorganized for clarity.

Honor. Deleted. The term is used only once (in Article 2)

outside of Article 5, where it is defined. Article 2 should simply

cross-reference the Article 5 definition.

Insolvent. Reference to bona fide disputes added.

Notice and knowledge. Moved to Section 1-202.

Organization. Revised to reflect standard NCCUSL language.

Person. Revised to reflect standard NCCUSL language.

Present value. Added. The term is used in both Articles 1 and

2A. Embedded definition removed from Section 1-203. Definition in

Article 2A should be deleted.

Security interest. That portion of definition that

distinguishes true lease from security interest has been moved to

Section 1-203.

Send. Revised to reflect self-transmission of a message by

sender.

Signed. Defintion reinstated.

State. Standard NCCUSL definition added.

Value. Moved to Section 1-204.

Written. Definition reinstated.

SECTION 1-202. NOTICE; KNOWLEDGE

(a) A person has notice of a fact if

(1) the person has actual knowledge of it;

(2) the person has received a notice or notification of

it; or

(3) from all the facts and circumstances known to the

person at the time in question the person has reason to know that

it exists.

(b) Knowledge means actual knowledge.

import refers to knowledge rather than to notice.

(d) A person notifies or gives a notice or notification

to another by taking such steps as may be reasonably required to

inform the other in ordinary course, whether or not the other

person actually comes to know of it. A person receives a notice

or notification when:

(1) it comes to that persons attention; or

(2) it is duly delivered in a form reasonable under the

circumstances at the place of business through which the contract

was made or at another location or system held out by that person

as the place for receipt of such communications.

(e) Notice, knowledge, or a notice or notification received

by an organization is effective for a particular transaction from

the time it is brought to the attention of the individual

conducting that transaction and, in any event, from the time it

would have been brought to the individuals attention if the

organization had exercised due diligence. An organization

exercises due diligence if it maintains reasonable routines for

communicating significant information to the person conducting the

transaction and there is reasonable compliance with the routines.

Due diligence does not require an individual acting for the

organization to communicate information unless such communication

is part of the individuals regular duties or the individual has

reason to know of the transaction and that the transaction would be

materially affected by the information.

(f) The time and circumstances under which a notice or

notification may cease to be effective are not determined by this

Act.

Changes From February 1997 Draft

At the suggestion of the Style Committee, Sections 1-201(25)-

(27) have been relocated from the definitional section to this

section.

SECTION 1-203. DISTINGUISHING LEASES FROM SECURITY INTERESTS.

(a) Whether a transaction creates a lease or security

interest is determined by the facts of each case. A transaction

creates a security interest if the consideration the lessee is to

pay the lessor for the right to possession and use of the goods is

an obligation for the term of the lease and is not subject to

termination by the lessee, and:

(1) the original term of the lease is equal to or greater

than the remaining economic life of the goods;

(2) the lessee is bound to renew the lease for the

remaining economic life of the goods or is bound to become the

owner of the goods;

(3) the lessee has an option to renew the lease for the

remaining economic life of the goods for no additional

consideration or nominal additional consideration upon compliance

with the lease agreement; or

(4) the lessee has an option to become the owner of the

goods for no additional consideration or nominal additional

consideration upon compliance with the lease agreement.

(b) A transaction does not create a security interest merely

because it provides that:

(1) the present value of the consideration the lessee is

obligated to pay the lessor for the right to possession and use of

the goods is substantially equal to or is greater than the fair

market value of the goods at the time the lease is entered into;

(2) the lessee assumes risk of loss of the goods, or

agrees to pay taxes, insurance, filing, recording, or registration

fees, or service or maintenance costs with respect to the goods;

(3) the lessee has an option to renew the lease or to

become the owner of the goods;

(4) the lessee has an option to renew the lease for a

fixed rent that is equal to or greater than the reasonably

predictable fair market rent for the use of the goods for the term

of the renewal at the time the option is to be performed; or

(5) the lessee has an option to become the owner of the

goods for a fixed price that is equal to or greater than the

reasonably predictable fair market value of the goods at the time

the option is to be performed.

the lessee's reasonably predictable cost of performing under the

lease agreement if the option is not exercised. Additional

consideration is not nominal if (i) when the option to renew the

lease is granted to the lessee, the rent is stated to be the fair

market rent for the use of the goods for the term of the renewal

determined at the time the option is to be performed, or (ii) when

the option to become the owner of the goods is granted to the

lessee, the price is stated to be the fair market value of the

goods determined at the time the option is to be performed.

(d) Reasonably predictable and remaining economic life of

the goods must be determined with reference to the facts and

circumstances at the time the transaction is entered into.

Changes From February 1997 Draft

Relocated from the definition of security interest at the

suggestion of Style Committee.

SECTION 1-204. VALUE. Except as otherwise provided with

respect to negotiable instruments, bank collections, and letters of

credit, a person gives "value" for rights if the person acquires

them:

(1) in return for a binding commitment to extend credit

or for the extension of immediately available credit whether or not

drawn upon and whether or not a charge-back is provided for in the

event of difficulties in collection;

(2) as security for, or in total or partial satisfaction

of, a preexisting claim;

(3) by accepting delivery pursuant to a preexisting

contract for purchase; or

(4) in return for any consideration sufficient to support

a simple contract.

Changes From February 1997 Draft

Relocated from Section 1-201 at the suggestion of the Style

Committee.

SECTION 1-205. REASONABLE TIME; SEASONABLENESS.

(a) Whether a time for taking an action required by this

[Act] is reasonable depends on the nature, purpose, and

circumstances of the action.

(b) An action is taken seasonably if it is taken at or

within the time agreed or, if no time is agreed, at or within a

reasonable time.

Changes From February 1997 Draft

Formerly Section 1-202.

PART 3

SCOPE, TERRITORIAL APPLICABILITY, AND GENERAL RULES

SECTION 1-301. SCOPE. Unless the context otherwise requires,

the provisions in this Part apply to a transaction to the extent

that it is governed by Article 2, 2A, 2B, 3, 4, 4A, 5, [6,] 7, 8,

or 9 of this Act.

Changes From February 1997 Draft

No substantive changes. Minor stylistic changes suggested by

Drafting Committee or Style Committee.

SECTION 1-302. TERRITORIAL APPLICATION OF THE ACT; PARTIES

POWER TO CHOOSE APPLICABLE LAW.

(a) Except as otherwise provided in subsection (c), an

agreement by parties to a transaction governed in whole or in part

by this [Act] that any or all of their rights and obligations with

respect to each other are to be determined by the law of this state

or another state or country is effective, whether or not the

transaction bears a reasonable relation to that state or country,

unless:

(1) the transaction is a consumer transaction and that

state or country is neither

(A) the state or country in which the consumer resides

at the time the transaction becomes enforceable or will reside

within 30 days thereafter, nor

(B) the state or country in which, pursuant to the

contract establishing the transaction, the goods, services, or

other consideration flowing to the consumer are to be received by

the consumer or a person designated by the consumer;

(2) the law of that state or country is contrary to a

fundamental public policy of the state or country whose law would

govern if the parties had not selected the governing law by

agreement; or

(3) the agreement of the parties selects the law of a

country other than the United States and the transaction does not

bear a reasonable relationship to a country other than the United

States.

(b) Except as otherwise provided in subsection (c), if

subsection (a) does not apply, the law determining the rights and

obligations of parties with respect to any aspect of a transaction

governed by this [Act] is the law that would ordinarily be selected

by application of this states conflict of laws principles[;

provided, however, that if application of such principles to a

transaction that is not a consumer transaction would result in the

unenforceability of all or part of an agreement that is enforceable

under the law of this state, the law governing those rights and

obligations is the law of this state unless the transaction does

not bear an appropriate relationship to this state].

the absence of agreement between the parties, the following

provisions of this Act specify the governing law, and a contrary

agreement is effective only to the extent permitted by those

provisions:

(1) Section 2-xxx

(2) Sections 2A-xxx

(3) Section 2B-xxx

(4) Section 4-102

(5) Section 4A-507

(6) Section 5-116

(7) Section 6-103

(8) Section 8-110

(9) Section 9-xxx

(d) For purposes of this section, a consumer is a person

who enters into a transaction (a consumer transaction) for

personal, family, or household purposes.

Changes From February 1997 Draft

Significantly rewritten since last draft.

Subsection (a) incorporates Alternative B of subsection (a)(1)

of the February 1997 Draft, allowing parties broad freedom to

select governing law, even if the transaction bears no relation to

the state or country whose law is selected, with two additional

limitations that did not appear in that draft. First, such a

choice will not be given effect if it would be contrary to a

fundamental public policy of the state or country whose law would

otherwise be chosen under subsection (b). Second, the agreement of

the parties may not select the law of a country other than the

United States unless the transaction bears a reasonable

relationship to a country other than the United States (not

necessarily the country selected).

Subsections (a)(1)(iii) and (a)(2) of the February 1997 Draft

have been deleted as redundant in light of Section 1-303. The

suggestion was made at the last Drafting Committee meeting that

parties should be able to select recognized bodies of rules or

principles applicable to commercial transactions that could not

have been selected via Section 1-303 in the case of rules

promulgated by intergovernmental authorities such as UNCITRAL or

UNIDROIT, but no action was taken on the suggestion.

Subsection (b), which deals with cases in which the parties have

not chosen the jurisdiction whose law governs, contains bracketed

language that would select the forum law if that law would render

the parties agreement enforceable while the law that would

otherwise be chosen under choice of law principles would result in

unenforceablility. The Drafting Committee should determine whether

to retain the bracketed language.

Subsection (d), concerning choice of forum clauses, has been

deleted pursuant to the Drafting Committees decision.

SECTION 1-303. VARIATION BY AGREEMENT

(a) The effect of provisions of this [Act] may be varied by

agreement, except as otherwise provided in this [Act] and except

that the obligations of good faith, diligence, reasonableness and

care prescribed by this [Act] may not be disclaimed by agreement.

The parties may, by agreement, determine the standards by which the

performance of such obligations is to be measured if such standards

are not manifestly unreasonable.

(b) The presence in certain provisions of this [Act] of the

words "unless otherwise agreed" or words of similar import does not

imply that the effect of other provisions may not be varied by

agreement under subsection (a).

Changes From February 1997 Draft

No changes.

SECTION 1-304. COURSE OF PERFORMANCE, COURSE OF DEALING, AND

USAGE OF TRADE.

(a) A course of performance is a sequence of conduct

between the parties to a particular transaction that exists if:

(1) the agreement of the parties with respect to the

transaction involves repeated occasions for performance by a

party;

(2) that party performs on one or more occasions; and

(3) the other party, with knowledge of the nature of the

performance and opportunity for objection to it, accepts the

performance or acquiesces in it without objection.

(b) A course of dealing is a sequence of previous conduct

between the parties to a particular transaction that is fairly to

be regarded as establishing a common basis of understanding for

interpreting their expressions and other conduct.

having such regularity of observance in a place, vocation or trade

as to justify an expectation that it will be observed with respect

to the transaction in question. The existence and scope of such a

usage are to be proved as facts. If it is established that such a

usage is embodied in a trade code or similar record the

interpretation of the record is a question of law.

(d) A course of performance or course of dealing between the

parties or usage of trade in the vocation or trade in which they

are engaged or of which they are or should be aware is relevant in

ascertaining the meaning of the parties agreement, may give

particular meaning to specific terms of the agreement, and may

supplement or qualify the terms of the agreement. A usage of trade

applicable where only part of the performance under the agreement

is to occur may be so utilized as to that part of the performance.

(e) Except as otherwise provided in subsection (f), the

express terms of an agreement and any applicable course of

performance, course of dealing or usage of trade shall be construed

wherever reasonable as consistent with each other. If such a

construction is unreasonable:

(1) express terms prevail over course of performance,

course of dealing, and usage of trade;

(2) course of performance prevails over course of dealing

and usage of trade; and

(3) course of dealing prevails over usage of trade.

(f) Subject to Sections [on modification and waiver], a

course of performance is relevant to show a waiver or modification

of any term inconsistent with such course of performance.

(g) Evidence of a relevant usage of trade offered by one

party is not admissible unless that party has given the other party

such notice as the court finds sufficient to prevent unfair

surprise to the latter.

Changes From February 1997 Draft

No substantive changes. Minor stylistic changes suggested by

Drafting Committee or Style Committee. It has been suggested that

subsection (g) be moved to a new section concerned with litigation

matters.

SECTION 1305. OBLIGATION OF GOOD FAITH. There is an obligation

to act in good faith in the performance and enforcement of every

contract and duty within the scope of this [Act].

Changes From February 1997 Draft

Rewritten in light of suggestions of Drafting Committee.

[ SECTION 1-306. UNCONSCIONABLE CONTRACT OR TERM.

(a) If a court finds as a matter of law that an agreement or

any term thereof was unconscionable at the time it was made [or was

induced by unconscionable conduct], the court may refuse to enforce

the agreement, enforce the remainder of the agreement without the

unconscionable term, or so limit the application of any

unconscionable term as to avoid an unconscionable result.

(b) Before making a finding of unconscionability under

subsection (a), the court, on motion of a party or its own motion,

shall afford the parties a reasonable opportunity to present

evidence as to the setting, purpose, and effect of the agreement or

term thereof or of the conduct.

agreement is governed by Article 5 of this [Act].]

Changes From February 1997 Draft

Entire section placed in brackets to indicate tentative nature

of this section. If it is decided to include this section in

Revised Article 1, the bracketed language on inducement by

unconscionable conduct should be considered separately for

determination as to whether it is appropriate for inclusion.

SECTION 1-307. STATUTE OF FRAUDS FOR PERSONAL PROPERTY NOT

OTHERWISE COVERED. [DELETED]

Changes From February 1997 Draft

Section deleted by decision of Drafting Committee. Drafting

Committee decided at February meeting that Article 1 should not

contain rules that govern non-UCC transactions.

SECTION 1308. REMEDIES TO BE LIBERALLY ADMINISTERED.

(a) The remedies provided by this [Act] shall be liberally

administered to the end that the aggrieved party may be put in as

good a position as if the other party had fully performed, but

neither consequential or special nor penal damages may be imposed

except as specifically provided in this [Act] or by other rule of

law.

(b) A right or obligation provided for by this [Act] is

enforceable by action unless the provision declaring it specifies

a different and limited effect.

Changes From February 1997 Draft

No substantive changes. Minor stylistic changes suggested by

Drafting Committee or Style Committee.

SECTION 1309. WAIVER OR RENUNCIATION OF CLAIM OR RIGHT AFTER

BREACH. A claim or right arising out of an alleged breach may be

discharged in whole or in part without consideration by agreement

of the aggrieved party in an authenticated record.

Changes From February 1997 Draft

No substantive changes. Minor stylistic changes suggested by

Drafting Committee or Style Committee.

SECTION 1310. PRIMA FACIE EVIDENCE BY THIRD PARTY DOCUMENTS.

A record in due form purporting to be a bill of lading, policy or

certificate of insurance, official weigher's or inspector's

certificate, consular invoice, or any other document authorized or

required by the contract to be issued by a third party is prima

facie evidence of its own authenticity and genuineness and of the

facts stated in the record by the third party.

Changes From February 1997 Draft

No substantive changes. Minor stylistic changes suggested by

Drafting Committee or Style Committee.

SECTION 1311. PERFORMANCE OR ACCEPTANCE UNDER RESERVATION OF

RIGHTS.

(a) Except as provided in subsection (b), a party that, with

explicit reservation of rights, performs or promises performance or

assents to performance in a manner demanded or offered by the other

party does not thereby prejudice the rights reserved. Such words

as "without prejudice", "under protest" or the like are sufficient.

(b) Subsection (a) does not apply to an accord and

satisfaction.

Changes From February 1997 Draft

No substantive changes. Minor stylistic changes suggested by

Drafting Committee or Style Committee.

SECTION 1312. OPTION TO ACCELERATE AT WILL. A term providing

that one party or that partys successor in interest may accelerate

payment or performance or require collateral or additional

collateral "at will" or when the party deems itself insecure" or

in words of similar import shall be construed to mean that the

party has power to do so only if that party in good faith believes

that the prospect of payment or performance is impaired. The

burden of establishing lack of good faith is on the party against

which the power has been exercised.

Changes From February 1997 Draft

No changes.

SECTION 1313. SUBORDINATED OBLIGATIONS. An obligation may be

issued as subordinated to payment of another obligation of the

person obligated, or a creditor may subordinate its right to

payment of an obligation by agreement with either the person

obligated or another creditor of the person obligated. Such a

subordination does not create a security interest as against either

the common debtor or a subordinated creditor.

Changes From February 1997 Draft

Bracketed language stating that the section shall be construed

as declaring the law as it existed prior ot the enactment of this

section and not as modifying it was deleted at the recommendation

of the Drafting Committee.