Common Law Contracts Vs. UCC Contracts

Two business teams signing contracts
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A contract is a legally enforceable written or spoken agreement between two parties. Contracts protect your rights in the workplace; when you buy and sell real estate and other assets; when you hire a contractor; when you take out a loan and in any other situation which imposes legal obligations on the parties. Essentially, a contract is a promise each party makes to do something for the other party in exchange for a benefit. A contract may fall under one of two general bodies of law – the common law of contracts and the Uniform Commercial Code, commonly known as the UCC.

Common Law of Contracts

The common law of contracts generally applies to contracts for employment, services, real estate, insurance and intangible assets. Common law is not written down in any particular place; rather, it is based on legal precedents taken from individual court rulings. Common law contracts may be between private individuals or commercial entities.

Uniform Commercial Code

UCC laws were set up by the non-profit organization National Conference of Commissioners on Uniform State Laws to regulate sales of personal property and other business transactions and to make it easier for businesses to work together across the U.S. Each state has its own, slightly different, version of the UCC. The UCC governs contracts for the sale of goods as well as leases and commercial paper. Examples of UCC transactions include purchasing a car with a bank loan and leasing or financing equipment for your business. If the transaction includes a security interest (such as when you take out a business loan and offer your business assets as collateral), the lender will file a UCC-1 financing statement, which includes information about both parties and a description of the property. If the collateral is a motor vehicle, the security interest is usually perfected by a notation on the vehicle's title. At least one of the parties to a UCC contract must be a commercial entity; otherwise, the UCC does not apply.

Mirror Image Rule

Generally, all legally binding contracts consist of six elements: offer, acceptance, consideration, mutuality of obligation, competence and capacity, and a written instrument. Acceptance is the expression of agreement to the terms of the contract, which may be communicated in writing, orally or by a specific action. This is one area where common law contracts and UCC contracts differ. Common law follows the mirror image rule, which means a legally recognized acceptance must be an exact mirror image of the terms of the offer. If the offer is amended, there can be no acceptance, but the terms can be renegotiated. An agreement is only reached when a new offer is accepted without modifications. On the other hand, minor amendments do not make UCC contracts void; only material changes are considered to have an impact.

Modification and Discharge

Under common law, a contract can only be modified if there is additional consideration or benefit given for the modification. For example, if an employment contract is modified to increase working hours, additional consideration would typically be provided by way of an increase in salary. However, a UCC contract can be modified without any additional consideration. A contract can be discharged – freeing both parties of their contractual obligations – if the contract is impracticable or impossible, although these two are distinct. A contract is impossible when one or all of the duties required under the contract cannot be performed; for example, if a law changes before the contract can be completed making one of the actions illegal, impossibility can discharge the contract. Impractability, on the other hand, is subjective. It means that a required term of the contract becomes impracticable, or becomes nearly impossible to complete or too expensive or too difficult through no fault of the performing party. A court must look at the circumstances and decide whether performance is impracticable enough to discharge the obligation. For instance, if the parties agree on a price based upon current market conditions, but events beyond anyone's control cause costs to skyrocket, a party may try to cancel the contract based upon impracticability.

Breach of Contract Lawsuits

You can sue for breach of contract both under common law and under UCC laws, but the eligibility requirements are different. Common law requires privity of contract, which means only the parties to the contract have the right to sue to enforce their rights or claims for damages. In other words, the contract cannot give rights or impose obligations on any person who is not a party to the contract. Under UCC laws, privity of contract is not necessary to be able to litigate the terms of a contract.

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