Official Comments in Article 1A:

Copyright 2001 by the American Law Institute and the National Conference of Commissioners on Uniform State Laws. Reprinted with permission of the Permanent Editorial Board of the Uniform Commercial Code.

PART 1. General Provisions.

§ 8.1A-101. Short titles.

  1. Titles 8.1 A through 8.9A may be cited as the Uniform Commercial Code.
  2. This title may be cited as Uniform Commercial Code — General Provisions.

History. 1964, c. 219, § 8.1-101 ; 2003, c. 353.

Law Review.

For article, “Why the Commercial Code Should be ‘Uniform’,” see 20 W. & L. Law Rev. 237 (1963).

For note, “Effect of the Uniform Commercial Code on Virginia Law,” see 20 W. & L. Law Rev. 267 (1963).

For survey of Virginia commercial law for the year 1968-1969, see 55 Va. L. Rev. 1372 (1969).

for the year 1971-1972, see 58 Va. L. Rev. 1183 (1972).

for the year 1975-1976, see 62 Va. L. Rev. 1375 (1976).

For article on the effect of delay on a surety’s obligations in Virginia, see 18 U. Rich. L. Rev. 781 (1984).

For survey of Virginia commercial law for the year 1989-1990, see 24 U. Rich. L. Rev. 551 (1990).

For a note, “Is the Statute of Frauds Ready for Electronic Contracting?” see 85 Va. L. Rev. 1447 (1999).

Research References.

Forms and Procedures Under the UCC (Matthew Bender). Hart.

UCC Reporter-Digest (Matthew Bender). Willier and Hart.

Virginia Forms (Matthew Bender). No. 8A-201 Variation from Uniform Commercial Code by Agreement.

Michie’s Jurisprudence.

For related discussion, see 3C M.J. Commercial Law, § 2.

CIRCUIT COURT OPINIONS

Health care provider not liable on a products liability theory. —

There was nothing in the Uniform Commercial Code as adopted by Virginia, or the Medical Malpractice Act, § 8.01-581.1 , which stated that supplying a patient with a device for a fee was not a sale and that a health care provider could not be liable on a products liability theory under such circumstances; and had the General Assembly intended health care providers to be treated as “merchants,” such a provision would have been covered in the Medical Malpractice Act, but was not. Therefore the health care company was not a “seller” and was not subject to liability on a products liability theory in the patient’s action because health care providers render a service to their patients, and the transfer of any type of device to the patient during treatment is merely incidental to that treatment. Coffman v. Arthrex, Inc., 69 Va. Cir. 17, 2005 Va. Cir. LEXIS 143 (Augusta County Mar. 31, 2005).

OFFICIAL COMMENT

Source: Former Section 1-101.

Changes from former law: Subsection (b) is new. It is added in order to make the structure of Article 1 parallel with that of the other articles of the Uniform Commercial Code.

  1. Each other article of the Uniform Commercial Code (except Articles 10 and 11) may also be cited by its own short title.  See Sections 2-101, 2A-101, 3-101, 4-101, 4A-101, 5-101, 6-101, 7-101, 8-101, and 9-101.

§ 8.1A-102. Scope of title.

This title applies to a transaction to the extent that it is governed by another title of the Uniform Commercial Code.

History. 2003, c. 353.

CASE NOTES

Application. —

Board’s authority under statutory law to limit compliance with pollution control standards by regulating the allowances or credits that could be obtained to meet those standards did not extend to barring any method by which the necessary credits or allowances were obtained. Statutory law prohibited such allowances or credits from being obtained through purchases, which involved the giving of consideration, and did not mean the much broader term “purchases” as defined in the Uniform Commercial Code, § 8.1A-201(b)(29) , because the Uniform Commercial Code consistent with § 8.1A-102 applied to commercial transactions not at issue and did not apply to air pollution control standards. Mirant Potomac River, LLC v. Commonwealth, 2009 Va. App. LEXIS 287 (Va. Ct. App. June 23, 2009).

OFFICIAL COMMENT

Source: New.

  1. This section is intended to resolve confusion that has occasionally arisen as to the applicability of the substantive rules in this article.  This section makes clear what has always been the case — the rules in Article 1 apply to transactions to the extent that those transactions are governed by one of the other articles  of the Uniform Commercial Code.  See also Comment 1 to Section 1-301 .

§ 8.1A-103. Construction of Uniform Commercial Code to promote its purposes and policies; applicability of supplemental principles of law.

  1. The Uniform Commercial Code 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.
  2. Unless displaced by the particular provisions of the Uniform Commercial Code, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, and other validating or invalidating cause supplement its provisions.

History. Code 1950, §§ 6-549, 13-183, 13.1-418, 61-2; 1956, c. 428; 1964, c. 219, §§ 8.1-102, 8.1-103; 2003, c. 353.

Michie’s Jurisprudence.

For related discussion, see 3C M.J. Commercial Law, §§ 6, 8-10, 20, 25, 34,36,95, 99, 100.

CASE NOTES

Editor’s note.

Some of the cases below were decided under former Title 8.1.

The “Official Comments” of the Uniform Commercial Code are not binding on the court, but they do represent powerful dicta. Girard Trust Co. v. Strickler, 458 F.2d 435, 1972 U.S. App. LEXIS 10240 (4th Cir. 1972).

Reliance on precode law in interpreting Commercial Code. —

The objective of uniformity of law would be frustrated if each jurisdiction relied solely on its precode law in interpreting the Uniform Commercial Code. Girard Trust Co. v. Strickler, 458 F.2d 435, 1972 U.S. App. LEXIS 10240 (4th Cir. 1972).

Continuance of common-law doctrines. —

Pursuant to § 8.1A-103 , unless displaced by particular provisions of the Uniform Commercial Code, common-law doctrines are continued. Helton v. Phillip A. Glick Plumbing, Inc., 277 Va. 352 , 672 S.E.2d 842, 2009 Va. LEXIS 27 (2009).

Usage of trade and course of dealing to explain or supplement contract. —

The importance of usage of trade and course of dealing between parties is shown by § 8.2-202 , which authorizes their use to explain or supplement a contract. Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3, 1971 U.S. App. LEXIS 7419 (4th Cir. 1971).

A number of Virginia cases have held that extrinsic evidence may not be received to explain or supplement a written contract unless the court finds the writing is ambiguous. This rule, however, has been changed by this section of the Uniform Commercial Code, which Virginia has adopted, since one of the underlying purposes and policies of the Code is the continued expansion of commercial practices through custom, usage and agreement of the parties. Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3, 1971 U.S. App. LEXIS 7419 (4th Cir. 1971).

Alteration of terms “due negotiation” and “holder in due course.” —

The U.C.C. does not permit the sort of alteration of the inviolable terms “due negotiation” and “holder in due course” found in a provision included in promissory notes which attempted to equate a “holder” with a mere possessor, to make “due negotiation” synonymous with delivery accompanied only by assignment, and to convert the meaning of “holder in due course” to one who possesses order paper by assignment. Becker v. National Bank & Trust Co., 222 Va. 716 , 284 S.E.2d 793, 1981 Va. LEXIS 365 (1981).

No obligation to respond to affidavit sent prior to lawsuit. —

Sections 8.1A-103 , 8.1A-201 (16), and 8.1A-204 did not suggest that defendants’ failure to respond to plaintiff’s affidavits, which were sent to contest a foreclosure prior to the filing of plaintiff’s lawsuit, constituted an admission that estopped defendants from disputing assertions in the affidavits. The statutory provisions did not even suggest that defendants had any legal duty to respond to plaintiff’s affidavits or that plaintiff could create such an obligation simply by stating in a document that the obligation existed and then having the document notarized. Bryant v. Wash. Mut. Bank, 524 F. Supp. 2d 753, 2007 U.S. Dist. LEXIS 93081 (W.D. Va. 2007), aff'd, 282 Fed. Appx. 260, 2008 U.S. App. LEXIS 13249 (4th Cir. 2008).

CIRCUIT COURT OPINIONS

Item used personally can be commercial transaction. —

Nothing in § 8.1A-103 suggests that the purchase of an item for personal use is not a commercial transaction. Credit Acceptance Corp. v. Coates, 75 Va. Cir. 267, 2008 Va. Cir. LEXIS 83 (Fairfax County June 20, 2008).

OFFICIAL COMMENT

Source: Former Section 1-102 (1)-(2); Former Section 1-103.

Changes from former law: This section is derived from subsections (1) and (2) of former Section 1-102 and from former Section 1-103. Subsection (a) of this section combines subsections (1) and (2) of former Section 1-102. Except for changing the form of reference to the Uniform Commercial Code and minor stylistic changes, its language is the same as subsections (1) and (2) of former Section 1-102. Except for changing the form of reference to the Uniform Commercial Code and minor stylistic changes, subsection (b) of this section is identical to former Section 1-103. The provisions have been combined in this section to reflect the interrelationship between them.

  1. The Uniform Commercial Code is drawn to provide flexibility so that, since it is intended to be a semi-permanent and infrequently-amended piece of legislation, it will provide its own machinery for expansion of commercial practices.  It is intended to make it possible for the law embodied in the Uniform Commercial Code to be applied by the courts in the light of unforeseen and new circumstances and practices.  The proper construction of the Uniform Commercial Code requires, of course, that its interpretation and application be limited to its reason.
  2. Applicability of supplemental principles of law.  Subsection (b) states the basic relationship of the Uniform Commercial Code to supplemental bodies of law.  The Uniform Commercial Code was drafted against the backdrop of existing bodies of law, including the common law and equity, and relies on those bodies of law to supplement it provisions in many important ways.  At the same time, the Uniform Commercial Code is the primary source of commercial law rules in areas that it governs, and its rules represent choices made by its drafters and the enacting legislatures about the appropriate policies to be furthered in the transactions it covers.  Therefore, while principles of common law and equity may supplement provisions of the Uniform Commercial Code, they may not be used to supplant its provisions, or the purposes and policies those provisions reflect, unless a specific provision of the Uniform Commercial Code provides otherwise.  In the absence of such a provision, the Uniform Commercial Code preempts principles of common law and equity that are inconsistent with either its provisions or its purposes and policies.
  3. Application of subsection (b) to statutes.  The primary focus of Section 1-103 is on the relationship between the Uniform Commercial Code and principles of common law and equity as developed by the courts.  State law, however, increasingly is statutory.  Not only are there a growing number of state statutes addressing specific issues that come within the scope of the Uniform Commercial Code, but in some States many general principles of common law and equity have been codified.  When the other law relating to a matter within the scope of the Uniform Commercial Code is a statute, the principles of subsection (b) remain relevant to the court’s analysis of the relationship between that statute and the Uniform Commercial Code, but other principles of statutory interpretation that specifically address the interrelationship between statutes will be relevant as well. In some situations, the principles of subsection (b) still will be determinative.  For example, the mere fact that an equitable principle is stated in statutory form rather than in judicial decisions should not change the court’s analysis of whether the principle can be used to supplement the Uniform Commercial Code — under subsection (b), equitable principles may supplement provisions of the Uniform Commercial Code only if they are consistent with the purposes and policies of the Uniform Commercial Code as well as its text.  In other situations, however, other interpretive principles addressing the interrelationship between statutes may lead the court to conclude that the other statute is controlling, even though it conflicts with the Uniform Commercial Code.  This, for example, would be the result in a situation where the other statute was specifically intended to provide additional protection to a class of individuals engaging in transactions covered by the Uniform Commercial Code.
  4. Listing not exclusive.  The list of sources of supplemental law in subsection (b) is intended to be merely illustrative of the other law that may supplement the Uniform Commercial Code, and is not exclusive. No listing could be exhaustive.  Further, the fact that a particular section of the Uniform Commercial Code makes express reference to other law is not intended to suggest the negation of the general application of the principles of subsection (b).  Note also that the word “bankruptcy” in subsection (b), continuing the use of that word from former Section 1-103, should be understood not as a specific reference to federal bankruptcy law but, rather as a reference to general principles of insolvency, whether under federal or state law.

Even prior to the enactment of the Uniform Commercial Code, courts were careful to keep broad acts from being hampered in their effects by later acts of limited scope. See Pacific Wool Growers v. Draper & Co., 158 Or. 1, 73 P.2d 1391 (1937), and compare Section 1-104. The courts have often recognized that the policies embodied in an act are applicable in reason to subject-matter that was not expressly included in the language of the act, Commercial Nat. Bank of New Orleans v. Canal-Louisiana Bank & Trust Co., 239 U.S. 520, 36 S. Ct. 194, 60 L. Ed. 417 (1916) (bona fide purchase policy of Uniform Warehouse Receipts Act extended to case not covered but of equivalent nature), and did the same where reason and policy so required, even where the subject-matter had been intentionally excluded from the act in general. Agar v. Orda, 264 N.Y. 248, 190 N.E. 479 (1934) (Uniform Sales Act change in seller’s remedies applied to contract for sale of choses in action even though the general coverage of that Act was intentionally limited to goods “other than things in action.”) They implemented a statutory policy with liberal and useful remedies not provided in the statutory text. They disregarded a statutory limitation of remedy where the reason of the limitation did not apply. Fiterman v. J. N. Johnson & Co., 156 Minn. 201, 194 N.W. 399 (1923) (requirement of return of the goods as a condition to rescission for breach of warranty; also, partial rescission allowed). Nothing in the Uniform Commercial Code stands in the way of the continuance of such action by the courts.

The Uniform Commercial Code should be construed in accordance with its underlying purposes and policies. The text of each section should be read in the light of the purpose and policy of the rule or principle in question, as also of the Uniform Commercial Code as a whole, and the application of the language should be construed narrowly or broadly, as the case may be, in conformity with the purposes and policies involved.

The language of subsection (b) is intended to reflect both the concept of supplementation and the concept of preemption. Some courts, however, had difficulty in applying the identical language of former Section 1-103 to determine when other law appropriately may be applied to supplement the Uniform Commercial Code, and when that law has been displaced by the Code. Some decisions applied other law in situations in which that application, while not inconsistent with the text of any particular provision of the Uniform Commercial Code, clearly was inconsistent with the underlying purposes and policies reflected in the relevant provisions of the Code. See, e.g., Sheerbonnet, Ltd. v. American Express Bank, Ltd., 951 F. Supp. 403 (S.D.N.Y. 1995). In part, this difficulty arose from Comment 1 to former Section 1-103, which stated that “this section indicates the continued applicability to commercial contracts of all supplemental bodies of law except insofar as they are explicitly displaced by this Act.” The “explicitly displaced” language of that Comment did not accurately reflect the proper scope of Uniform Commercial Code preemption, which extends to displacement of other law that is inconsistent with the purposes and policies of the Uniform Commercial Code, as well as with its text.

§ 8.1A-104. Construction against implied repeal.

The Uniform Commercial Code being a general act intended as a unified coverage of its subject matter, no part of it shall be deemed to be impliedly repealed by subsequent legislation if such construction can reasonably be avoided.

History. 1964, c. 219, § 8.1-104; 2003, c. 353.

Law Review.

For comment on cumulative remedies under article 9 of the U.C.C., see 14 Wm. & Mary L. Rev. 213 (1972).

OFFICIAL COMMENT

Source: Former Section 1-104.

Changes from former law: Except for changing the form of reference to the Uniform Commercial Code, this section is identical to former Section 1-104.

  1. This section embodies the policy that an act that bears evidence of carefully considered permanent regulative intention should not lightly be regarded as impliedly repealed by subsequent legislation.  The Uniform Commercial Code, carefully integrated and intended as a uniform codification of permanent character covering an entire “field” of law, is to be regarded as particularly resistant to implied repeal.

§ 8.1A-105. Repealed by Acts 2015, c. 709, cl. 2.

Cross references.

Former § 8.1A-105 , pertaining to severability, derived from 1964, c. 219, § 8.1-108; 2003, c. 353.

§ 8.1A-106. Use of singular and plural; gender.

In the Uniform Commercial Code, unless the statutory context otherwise requires:

  1. words in the singular number include the plural, and those in the plural include the singular; and
  2. words of any gender also refer to any other gender.

History. 1964, c. 219, § 8.1-102; 2003, c. 353.

OFFICIAL COMMENT

Source: Former Section 1-102(5). See also 1 U.S.C. Section 1.

Changes from former law: Other than minor stylistic changes, this section is identical to former Section 1-102(5).

  1. This section makes it clear that the use of singular or plural in the text of the Uniform Commercial Code is generally only a matter of drafting style — singular words may be applied in the  plural, and plural words may be applied in the singular. Only when it is clear from the statutory context that the use of the singular or plural does not include the other is this rule inapplicable.  See, e.g., Section 9-322.

§ 8.1A-107. Section captions.

Section captions are part of the Uniform Commercial Code.

History. 1964, c. 219, § 8.1-109; 2003, c. 353.

OFFICIAL COMMENT

Source: Former Section 1-109.

Changes from former law: None.

  1. Section captions are a part of the text of the Uniform Commercial Code, and not mere surplusage.  This is not the case, however, with respect to subsection headings appearing in Article 9.  See Comment 3 to Section 9-101 (“subsection headings are not a part of the official text itself and have not been approved by the sponsors.”).

§ 8.1A-108. Relation to Electronic Signatures in Global and National Commerce Act.

This title modifies, limits, and supersedes the federal Electronic Signatures in Global and National Commerce Act, 15 U.S.C. § 7001 et seq., except that nothing in this title modifies, limits, or supersedes § 7001(c) of that Act or authorizes electronic delivery of any of the notices described in § 7003(b) of that Act.

History. 2003, c. 353.

OFFICIAL COMMENT

Source: New.

  1. The federal Electronic Signatures in Global and National Commerce Act, 15 U.S.C. Section 7001et seq became effective in 2000.  Section 102(a) of that Act provides that a State statute may modify, limit, or supersede the provisions of section 101 of that Act with respect to state law if such statute, inter alia, specifies the alternative procedures or requirements for the use or acceptance (or both) of electronic records or electronic signatures to establish the legal effect, validity, or enforceability of contracts or other records, and (i) such alternative procedures or requirements are consistent with Titles I and II of that Act, (ii) such alternative procedures or requirements do not require, or accord greater legal status or effect to, the implementation or application of a specific technology or technical specification for performing the functions of creating, storing, generating, receiving, communicating, or authenticating electronic records or electronic signatures; and (iii) if enacted or adopted after the date of the enactment of that Act, makes specific reference to that Act. Article 1 fulfills the first two of those three criteria; this Section fulfills the third criterion listed above.
  2. As stated in this section, however, Article 1 does not modify, limit, or supersede Section 101(c) of the Electronic Signatures in Global and National Commerce Act (requiring affirmative consent from a consumer to electronic delivery of transactional disclosures that are required by state law to be in writing); nor does it authorize electronic delivery of any of the notices described in Section 103(b) of that Act.

PART 2. General Definitions and Principles of Interpretation.

§ 8.1A-201. General definitions.

  1. Unless the context otherwise requires, words or phrases defined in this section, or in the additional definitions contained in other titles of the Uniform Commercial Code that apply to particular titles or parts thereof, have the meanings stated.
  2. Subject to definitions contained in other titles of the Uniform Commercial Code that apply to particular titles or parts thereof:
    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 pursue a remedy.
    3. “Agreement,” as distinguished from “contract,” means the bargain of the parties in fact, as found in their language or inferred from other circumstances, including course of performance, course of dealing, or usage of trade as provided in § 8.1A-303 .
    4. “Bank” means a person engaged in the business of banking and includes a savings bank, savings and loan association, credit union, and trust company.
    5. “Bearer” means a person in control of a negotiable electronic document or a person in possession of a negotiable instrument, negotiable tangible document of title, or certificated security that is payable to bearer or endorsed in blank.
    6. “Bill of lading” means a document evidencing the receipt of goods for shipment issued by a person engaged in the business of directly or indirectly transporting or forwarding goods. The term does not include a warehouse receipt.
    7. “Branch” includes a separately incorporated foreign branch of a bank.
    8. “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 nonexistence.
    9. “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 seller’s own usual or customary practices. A person that sells oil, gas, or other minerals 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 preexisting contract for sale. Only a buyer that takes possession of the goods or has a right to recover the goods from the seller under Title 8.2 may be a buyer in ordinary course of business. “Buyer in ordinary course of business” does not include a person that acquires goods in a transfer in bulk or as security for or in total or partial satisfaction of a money debt.
    10. “Conspicuous,”  with reference to a term, means so written, displayed, or presented that a reasonable person against whom it is to operate ought to have noticed it. Whether a term is “conspicuous” or not is a decision for the court. Conspicuous terms include the following:
      1. a heading in capitals equal to or greater in size than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same or lesser size; and
      2. language in the body of a record or display in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or set off from surrounding text of the same size by symbols or other marks that call attention to the language.
    11. “Consumer” means an individual who enters into a transaction primarily for personal, family, or household purposes.
    12. “Contract,” as distinguished from “agreement,” means the total legal obligation that results from the parties’ agreement as determined by the Uniform Commercial Code as supplemented by any other applicable laws.
    13. “Creditor”  includes a general creditor, a secured creditor, a lien creditor, and any representative of creditors, including an assignee for the benefit of creditors, a trustee in bankruptcy, a receiver in equity, and an executor or administrator of an insolvent debtor’s or assignor’s estate.
    14. “Defendant” includes a person in the position of defendant in a counterclaim, cross-claim, or third-party claim.
    15. “Delivery,” with respect to an electronic document of title means voluntary transfer of control and with respect to an instrument, a tangible document of title, or chattel paper, means voluntary transfer of possession.
    16. “Document of title” means a  record (i) that  in the regular course of business or financing is treated as adequately evidencing that the person in possession or control of the record is entitled to receive, control, hold, and dispose of the record and the goods it covers  and (ii) that purports to be issued by or addressed to a bailee and to cover goods in the bailee’s possession that are either identified or are fungible portions of an identified mass. The term includes a bill of lading, transport document, dock warrant, dock receipt, warehouse receipt, and order for delivery of goods. An electronic document of title means a document of title evidenced by a record consisting of information stored in an electronic medium. A tangible document of title means a document of title evidenced by a record consisting of information that is inscribed on a tangible medium.
    17. “Fault” means a default, breach, or wrongful act or omission.
    18. “Fungible goods” means:
      1. goods of which any unit, by nature or usage of trade, is the equivalent of any other like unit; or
      2. goods that by agreement are treated as equivalent.
    19. “Genuine” means free of forgery or counterfeiting.
    20. “Good faith” means honesty in fact in the conduct or transaction concerned.
    21. “Holder” means:
      1. the person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession;
      2. the person in possession of a negotiable tangible document of title if the goods are deliverable either to bearer or to the order of the person in possession; or
      3. the person in control of a negotiable electronic document of title.
    22. “Insolvency proceeding” includes an assignment for the benefit of creditors or other proceeding intended to liquidate or rehabilitate the estate of the person involved.
    23. “Insolvent” means:
      1. having generally ceased to pay debts in the ordinary course of business other than as a result of bona fide dispute;
      2. being unable to pay debts as they become due; or
      3. being insolvent within the meaning of federal bankruptcy law.
    24. “Money” means a medium of exchange currently authorized or adopted by a domestic or foreign government. The term includes a monetary unit of account established by an intergovernmental organization or by agreement between two or more countries.
    25. “Organization” means a person other than an individual.
    26. “Party,” as distinguished from “third party,” means a person that has engaged in a transaction or made an agreement subject to the Uniform Commercial Code.
    27. “Person” means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government, governmental subdivision, agency, or instrumentality, public corporation, or any other legal or commercial entity.
    28. “Present value” means the amount as of a date certain of one or more sums payable in the future, discounted to the date certain by use of either an interest rate specified by the parties if that rate is not manifestly unreasonable at the time the transaction is entered into or, if an interest rate is not so specified, a commercially reasonable rate that takes into account the facts and circumstances at the time the transaction is entered into.
    29. “Purchase” means taking by sale, lease, discount, negotiation, mortgage, pledge, lien, security interest, issue or reissue, gift, or any other voluntary transaction creating an interest in property.
    30. “Purchaser” means a person that takes by purchase.
    31. “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.
    32. “Remedy” means any remedial right to which an aggrieved party is entitled with or without resort to a tribunal.
    33. “Representative” means a 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.
    34. “Right” includes remedy.
    35. “Security interest” means an interest in personal property or fixtures that secures payment or performance of an obligation. “Security interest” includes any interest of a consignor and a buyer of accounts, chattel paper, a payment intangible, or a promissory note in a transaction that is subject to Title 8.9A. “Security interest” does not include the special property interest of a buyer of goods on identification of those goods to a contract for sale under § 8.2-401 , but a buyer may also acquire a “security interest” by complying with Title 8.9A. Except as otherwise provided in § 8.2-505 , the right of a seller or lessor of goods under Title 8.2 or Title 8.2A to retain or acquire possession of the goods is not a “security interest,” but a seller or lessor may also acquire a “security interest” by complying with Title 8.9A. The retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer under § 8.2-401 is limited in effect to a reservation of a “security interest.” Whether a transaction in the form of a lease creates a “security interest” is determined pursuant to § 8.1A-203 .
    36. “Send” in connection with a writing, record, or notice means:
      1. to deposit in the mail or deliver for transmission by any other usual means of communication with postage or cost of transmission provided for and properly addressed and, in the case of an instrument, to an address specified thereon or otherwise agreed, or if there be none to any address reasonable under the circumstances; or
      2. in any other way to cause to be received any record or notice within the time it would have arrived if properly sent.
    37. “Signed” includes using any symbol executed or adopted with present intention to adopt or accept a writing.
    38. “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.
    39. “Surety” includes a guarantor or other secondary obligor.
    40. “Term” means a portion of an agreement that relates to a particular matter.
    41. “Unauthorized signature” means a signature made without actual, implied, or apparent authority. The term includes a forgery.
    42. “Warehouse receipt” means a document of title issued by a person engaged in the business of storing goods for hire.
    43. “Writing” includes printing, typewriting, or any other intentional reduction to tangible form. “Written” has a corresponding meaning.

History. Code 1950, §§ 6-408, 6-544, 6-550; 1964, c. 219, § 8.1-201; 1973, c. 509; 1984, c. 613; 1991, c. 536; 1992, c. 693; 2000, c. 1007; 2003, c. 353; 2004, c. 200.

The 2004 amendments.

The 2004 amendment by c. 200, in subdivision (b)(5), inserted “control of a negotiable electronic document or a person in” and “negotiable tangible”; in subdivision (b)(6), inserted “directly or indirectly” in the first sentence and added the second sentence; in subdivision (b)(15), inserted “to an electronic document of title means voluntary transfer of control and with respect” and “a tangible”; rewrote subdivision (b)(16); inserted “negotiable tangible” in paragraph (b)(21)(B); added paragraph (b)(21)(C); substituted “document of title” for “receipt” in subdivision (b)(42); and made minor stylistic changes.

Law Review.

For article on the “fresh start” policy in consumer bankruptcy, see 21 U. Rich. L. Rev. 49 (1986).

Research References.

Bryson on Virginia Civil Procedure (Matthew Bender). Chapter 18. Enforcement of Judgments and Decrees. § 18.03 Equity. Bryson.

Virginia Forms (Matthew Bender). No. 13-314. Contract to Build a House — Miscellaneous Provisions.

Michie’s Jurisprudence.

For related discussion, see 2A M.J. Assignments, §§ 9, 17; 2A M.J. Assignments for the Benefit of Creditors, § 49; 3B M.J. Civil Rights, § 2; 3C M.J. Commercial Law, §§ 4, 5, 8, 10-13, 15, 17, 20-26 , 30, 31, 60, 96, 98, 100, 101.

CASE NOTES

Editor’s note.

Some of the cases below were decided under former Title 8.1.

Whether a provision is conspicuous is a question of law for a court. Armco, Inc. v. New Horizon Dev. Co., 229 Va. 561 , 331 S.E.2d 456, 1985 Va. LEXIS 232 (1985).

“Conspicuous.” —

Plaintiff’s argument that the district court’s construction of “prominent” was erroneous because it failed to give force to the entire definition of “conspicuous” overlooked the fact that the requirement that a term or provision be “in larger font or other contrasting type or color” only applied to form documents. JTH Tax, Inc. v. H&R Block E. Tax Servs., 359 F.3d 699, 2004 U.S. App. LEXIS 3523 (4th Cir. 2004).

Implied warranties in a contract for sale of an RV were not effectively disclaimed under § 8.2-316(2) , as they were not conspicuous as defined in § 8.1A-201(b)(10) where the disclaimer clause was located in the middle of the back page of the buyer’s order; the language referring the buyer to the back page — the merger clause — was located in the middle of the front page in an extremely small font size; the signatures of the buyer and dealer were on the bottom of the first page, and no signatures or initials appeared on the back of the page; font and print colors sizes were the same; and the disclaimer clause was not set off from the other paragraphs on the back side of the order in any distinctive way. Hoffman v. Daimler Trucks N. Am., LLC, 940 F. Supp. 2d 347, 2013 U.S. Dist. LEXIS 53118 (W.D. Va. 2013).

“Good faith.” —

Bank’s request for additional collateral after two previous modifications, a history of delinquent payments, and bank’s calling of the demand note did not constitute bad faith or misconduct on the part of the bank. Dominion Bank v. Moore, 688 F. Supp. 1084, 1988 U.S. Dist. LEXIS 7764 (W.D. Va. 1988).

The Uniform Commercial Code (U.C.C.) term “good faith” is defined as “honesty in fact in the conduct or transaction concerned.” When parties to a contract create valid and binding rights, one party does not breach the U.C.C.’s obligation of good faith by exercising such rights. Charles E. Brauer Co. v. NationsBank, 251 Va. 28 , 466 S.E.2d 382, 1996 Va. LEXIS 5 (1996).

A transferee may become a holder of order paper only by “negotiation,” that is, by endorsement and delivery, and the endorsement must be by or on behalf of a person who is himself a holder. Mere assignment is insufficient. Becker v. National Bank & Trust Co., 222 Va. 716 , 284 S.E.2d 793, 1981 Va. LEXIS 365 (1981).

The definition of a “nominal consideration” in subsection (37) 1 (b) of former § 8.1-201 [see now subsection (35) of § 8.1A-201 ] may vary, but the best formula for determining whether a lessee may purchase leased property for a “nominal” sum has been described as the “economic realities” test. If at the end of the term, the only economically sensible course for the lessee is to exercise the option to purchase the property, then the agreement is a security agreement. Litton Indus. Credit Corp. v. Dunn Bros., 16 Bankr. 42, 1981 Bankr. LEXIS 2618 (Bankr. W.D. Va. 1981).

“Purchase.” —

Board’s authority under statutory law to limit compliance with pollution control standards by regulating the allowances or credits that could be obtained to meet those standards did not extend to barring any method by which the necessary credits or allowances were obtained. Statutory law prohibited such allowances or credits from being obtained through purchases, which involved the giving of consideration, and did not mean the much broader term “purchases” as defined in the Uniform Commercial Code, § 8.1-201(b)(29), because the Uniform Commercial Code applied to commercial transactions not at issue and did not apply to air pollution control standards. Mirant Potomac River, LLC v. Commonwealth, 2009 Va. App. LEXIS 287 (Va. Ct. App. June 23, 2009).

A mere business relationship with assignor is not a badge of fraud which denies one the status of holder in due course. White v. Gilliam, 244 Va. 113 , 419 S.E.2d 247, 8 Va. Law Rep. 3288, 1992 Va. LEXIS 74 (1992).

Written sales brochures given by seller to purchaser met the signature requirement of the statute of frauds, because the seller’s trademark appeared on the documents, and that was sufficient to authenticate them. Barber & Ross Co. v. Lifetime Doors, Inc., 810 F.2d 1276, 1987 U.S. App. LEXIS 1480 (4th Cir.), cert. denied, 484 U.S. 823, 108 S. Ct. 86, 98 L. Ed. 2d 48, 1987 U.S. LEXIS 3504 (1987).

Delivery of check. —

Check was negotiated in Illinois since the delivery of the check occurred when seller’s bank in Illinois received the check and deposited it in seller’s account and that was when the transferee bank became the holder; therefore, the negotiation of the check in Illinois, required the substantive law of Illinois to be applied to the issue of whether there was a valid accord and satisfaction. Western Branch Holding Co. v. Trans Mktg. Houston, Inc., 722 F. Supp. 1339, 1989 U.S. Dist. LEXIS 12297 (E.D. Va. 1989).

No obligation to respond to affidavit sent prior to lawsuit. —

Subdivision 16 of § 8.1A-201 did not suggest that defendants’ failure to respond to plaintiff’s affidavits, which were sent to contest a foreclosure prior to the filing of plaintiff’s lawsuit, constituted an admission that estopped defendants from disputing assertions in the affidavits. The statutory provisions did not even suggest that defendants had any legal duty to respond to plaintiff’s affidavits or that plaintiff could create such an obligation simply by stating in a document that the obligation existed and then having the document notarized. Bryant v. Wash. Mut. Bank, 524 F. Supp. 2d 753, 2007 U.S. Dist. LEXIS 93081 (W.D. Va. 2007), aff'd, 282 Fed. Appx. 260, 2008 U.S. App. LEXIS 13249 (4th Cir. 2008).

CIRCUIT COURT OPINIONS

“Bad faith.” —

Court found that plaintiff corporation’s principal acted in bad faith in his dealings with defendant; among other things, the principal engaged in discussions and actions to undermine the sample approval process and to divert a proposed contract. Umbrella Corp. Weapons Research Grp. v. AGF Defcom, Inc., 106 Va. Cir. 410, 2020 Va. Cir. LEXIS 487 (Virginia Beach Dec. 18, 2020).

“Security interest.” —

Because a guarantor alleged that the transactions involved in a commercial financial agreement were secured transactions and created a security interest, he sufficiently alleged that the implied duty of good faith was applicable. The guarantor alleged that the transactions formed the bargain of the parties in fact, and provided for the bank’s interest in personal property in exchange for financing arrangements. Wachovia Bank, N.A. v. Ranson Tyler Chevrolet, L.L.C., 73 Va. Cir. 143, 2007 Va. Cir. LEXIS 43 (Roanoke Mar. 27, 2007).

“Unauthorized signature.” —

Lender was entitled to collect the principal plus interest against the individual signer of the promissory note because, while he signed only once, he signed the note granting a personal guarantee with the then-present intention of being personally liable on it, his signature constituted an “unauthorized signature,” he was personally liable on the contract, and the lender would not have extended the loan to the borrower but for the individual’s personal guarantee. Pillar Inv., LLC v. QDEF 16 LLC, 2022 Va. Cir. LEXIS 16 (Fairfax County Mar. 11, 2022).

OFFICIAL COMMENT

Source: Former Section 1-201 .

Changes from former law: In order to make it clear that all definitions in the Uniform Commercial Code (not just those appearing in Article 1, as stated in former Section 1-201 , but also those appearing in other Articles) do not apply if the context otherwise requires, a new subsection (a) to that effect has been added, and the definitions now appear in subsection (b). The reference in subsection (a) to the “context” is intended to refer to the context in which the defined term is used in the Uniform Commercial Code. In other words, the definition applies whenever the defined term is used unless the context in which the defined term is used in the statute indicates that the term was not used in its defined sense. Consider, for example, Sections 3-103(a)(9) (defining “promise,” in relevant part, as “a written undertaking to pay money signed by the person undertaking to pay”) and 3-303(a)(1) (indicating that an instrument is issued or transferred for value if “the instrument is issued or transferred for a promise of performance, to the extent that the promise has been performed.” It is clear from the statutory context of the use of the word “promise” in Section 3-303(a)(1) that the term was not used in the sense of its definition in Section 3-103(a)(9). Thus, the Section 3-103(a)(9) definition should not be used to give meaning to the word “promise” in Section 3-303(a).

Some definitions in former Section 1-201 have been reformulated as substantive provisions and have been moved to other sections. See Sections 1-202 (explicating concepts of notice and knowledge formerly addressed in Sections 1-201 (25)-(27)), 1-204 (determining when a person gives value for rights, replacing the definition of “value” in former Section 1-201(44)), and 1-206 (addressing the meaning of presumptions, replacing the definitions of “presumption” and “presumed” in former Section 1-201(31)). Similarly, the portion of the definition of “security interest” in former Section 1-201(37) which explained the difference between a security interest and a lease has been relocated to Section 1-203 .

Two definitions in former Section 1-201 have been deleted. The definition of “honor” in former Section 1-201 (21) has been moved to Section 2-103(1)(b), inasmuch as the definition only applies to the use of the word in Article 2. The definition of “telegram” in former Section 1-201 (41) has been deleted because that word no longer appears in the definition of “conspicuous.”

Other than minor stylistic changes and renumbering, the remaining definitions in this section are as in former Article 1 except as noted below.

  1. “Action.”  Unchanged from former Section 1-201 , which was derived from similar definitions in Section 191, Uniform Negotiable Instruments Law;  Section 76, Uniform Sales Act; Section 58, Uniform Warehouse Receipts Act;  Section 53, Uniform Bills of Lading Act.
  2. “Aggrieved party.” Unchanged from former Section 1-201 .
  3. “Agreement.”  Derived from former Section 1-201 .  As used in the Uniform Commercial Code the word is intended to include full recognition of usage of trade, course of dealing, course of performance and the surrounding circumstances as effective parts thereof, and of any agreement permitted under the provisions of the Uniform Commercial Code to displace a stated rule of law.  Whether an agreement has legal consequences is determined by applicable provisions of the Uniform Commercial Code and, to the extent provided in Section 1-103, by the law of contracts.
  4. “Bank.”  Derived from Section 4A-104.
  5. “Bearer.”  Unchanged, except in one respect, from former Section 1-201 , which was derived from Section 191, Uniform Negotiable Instruments Law. The term bearer applies to negotiable documents of title and has been broadened to include a person in control of an electroic negotiable document of title. Control of an electronic document of title is defined in Article 7 (Section 7-106).
  6. “Bill of Lading.”  Derived from former Section 1-201 . The reference to, and definition of, an “airbill” has been deleted as no longer necessary. A bill of lading is one type of document of title as defined in subsection (16). This definition should be read in conjunction with the definition of carrier in Article 7 (Section 7-102).
  7. “Branch.”  Unchanged from former Section 1-201 .
  8. “Burden of establishing a fact.”  Unchanged from former Section 1-201 .
  9. “Buyer in ordinary course of business.” Except for minor stylistic changes, identical to former Section 1-201 (as amended in conjunction with the 1999 revisions to Article 9). The major significance of the phrase lies in Section 2-403 and in the Article on Secured Transactions (Article 9).
  10. “Conspicuous.”  Derived from former Section 1-201 (10). This definition states the general standard that to be conspicuous a term ought to be noticed by a reasonable person.  Whether a term is conspicuous is an issue for the court. Subparagraphs (A) and (B) set out several methods for making a term conspicuous.  Requiring that a term be conspicuous blends a notice function (the term ought to be noticed) and a planning function (giving guidance to the party relying on the term regarding how that result can be achieved).  Although these paragraphs indicate some of the methods for making a term attention-calling, the test is whether attention can reasonably be expected to be called to it.  The statutory language should not be construed to permit a result that is inconsistent with that test.
  11. “Consumer.”  Derived from Section 9-102(a)(25).
  12. “Contract.”  Except for minor stylistic changes, identical to former Section 1-201 .
  13. “Creditor.”  Unchanged from former Section 1-201 .
  14. “Defendant.”  Except for minor stylistic changes, identical to former Section 1-201 , which was derived from Section 76, Uniform Sales Act.
  15. “Delivery.”  Derived from former Section 1-201 .  The reference to certificated securities has been deleted in light of the more specific treatment of the matter in Section 8-301. The definition has been revised to accommodate electronic documents of title. Control of an electronic document of title is defined in Article 7 (Section 7-106).
  16. “Document of title.”  Derived from former Section 1-201 , which was derived from Section 76, Uniform Sales Act. This definition makes explicit that the obligation or designation of a third party as “bailee” is essential to a document of title, this definition clearly rejects any such result as obtained in Hixson v. Ward, 254 Ill.App. 505 (1929), which treated a conditional sales contract as a document of title.  Also the definition is left open so that new types of documents may be included, including documents which gain commercial recognition in the international arena. See UNCITRAL Draft Instrument on the Carriage of Goods By Sea.  It is unforeseeable what documents may one day serve the essential purpose now filled by warehouse receipts and bills of lading.  The definition is stated in terms of the function of the documents with the intention that any document which gains commercial recognition as accomplishing the desired result shall be included within its scope.  Fungible goods are adequately identified within the language of the definition by identification of the mass of which they are a part.
  17. “Fault.”  Derived from former Section 1-201 . “Default” has been added to the list of events constituting fault.
  18. “Fungible goods.”  Derived from former Section 1-201 . References to securities have been deleted because Article 8 no longer uses the term “fungible” to describe securities. Accordingly, this provision now defines the concept only in the context of goods.
  19. “Genuine.”  Unchanged from former Section 1-201 .
  20. “Good faith.”  Former Section 1-201 (19) defined “good faith” simply as honesty in fact; the definition contained no element of commercial reasonableness.  Initially, that definition applied throughout the Code with only one exception.  Former Section 2-103(1)(b) provided that “in this Article . . . good faith  in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.”  This alternative definition was limited in applicability in three ways.  First, it applied only to transactions within the scope of Article 2.  Second, it applied only to merchants.  Third, strictly construed it applied only to uses of the phrase “good faith” in Article 2; thus, so construed it would not define “good faith” for its most important use — the obligation of good faith imposed by former Section 1-203 .
  21. “Holder.” Derived from former Section 1-201 .  The definition has been reorganized for clarity and amended to provide for electronic negotiable documents of title.
  22. “Insolvency proceedings.”  Unchanged from former Section 1-201 .
  23. “Insolvent.”  Derived from former Section 1-201 .  The three tests of insolvency — “generally ceased to pay debts in the ordinary course of business other than as a result of a bona fide dispute as to them,” “unable to pay debts as they become due,” and “insolvent within the meaning of the federal bankruptcy law” — are expressly set up as alternative tests and must be approached from a commercial standpoint.
  24. “Money.”  Substantively identical to former Section 1-201 .  The test is that of sanction of government, whether by authorization before issue or adoption afterward, which recognizes the circulating medium as a part of the official currency of that government.  The narrow view that money is limited to legal tender is rejected.
  25. “Organization.”  The former definition of this word has been replaced with the standard definition used in acts prepared by the National Conference of Commissioners on Uniform State Laws.
  26. “Party.”  Substantively identical to former Section 1-201 .  Mention of a party includes, of course, a person acting through an agent.  However, where an agent comes into opposition or contrast to the principal, particular account is taken of that situation.
  27. “Person.” The former definition of this word has been replaced with the standard definition used in acts prepared by the National Conference of Commissioners on Uniform State Laws.
  28. “Present value.”  This definition was formerly contained within the definition of “security interest” in former Section 1-201 (37).
  29. “Purchase.”  Derived from former Section 1-201 .  The form of definition has been changed from “includes” to “means.”
  30. “Purchaser.”  Unchanged from former Section 1-201 .
  31. “Record.”  Derived from Section 9-102(a)(69).
  32. “Remedy.”  Unchanged from former Section 1-201 .  The purpose is to make it clear that both remedy and right (as defined) include those remedial rights of “self help” which are among the most important bodies of rights under the Uniform Commercial Code, remedial rights being those to which an aggrieved party may resort on its own.
  33. “Representative.”  Derived from former Section 1-201 . Reorganized, and form changed from “includes” to “means.”
  34. “Right.”  Except for minor stylistic changes, identical to former Section 1-201 .
  35. “Security Interest.”  The definition is the first paragraph of the definition of “security interest” in former Section 1-201 , with minor stylistic changes.  The remaining portion of that definition has been moved to Section 1-203 . Note that, because of the scope of Article 9, the term includes the interest of certain outright buyers of certain kinds of property.
  36. “Send.”  Derived from former Section 1-201 .  Compare “notifies”.
  37. “Signed.” Derived from former Section 1-201 .  Former Section 1-201 referred to “intention to authenticate”; because other articles now use the term “authenticate,” the language has been changed to “intention to adopt or accept.”  The latter formulation is derived from the definition of “authenticate” in Section 9-102(a)(7).  This provision refers only to writings, because the term “signed,” as used in some articles, refers only to writings.  This provision also makes it clear that, as the term “signed” is used in the Uniform Commercial Code, a complete signature is not necessary.  The symbol may be printed, stamped or written;  it may be by initials or by thumbprint.  It may be on any part of the document and in appropriate cases may be found in a billhead or letterhead.  No catalog of possible situations can be complete and the court must use common sense and commercial experience in passing upon these matters.  The question always is whether the symbol was executed or adopted by the party with present intention to adopt or accept the writing.
  38. “State.”  This is the standard definition of the term used in acts prepared by the National Conference of Commissioners on Uniform State Laws.
  39. “Surety.”  This definition makes it clear that “surety” includes all secondary obligors, not just those whose obligation refers to the person obligated as a surety. As to the nature of secondary obligations generally, see Restatement (Third), Suretyship and Guaranty Section 1 (1996).
  40. “Term.”  Unchanged from former Section 1-201 .
  41. “Unauthorized signature.”  Unchanged from former Section 1-201 .
  42. “Warehouse receipt.”  Derived from former Section 1-201 , which was derived from Section 76(1), Uniform Sales Act;  Section 1, Uniform Warehouse Receipts Act.  Receipts issued by a field warehouse are included, provided the warehouseman and the depositor of the goods are different persons. The definition makes clear that the receipt must qualify as a document of title under subsection (16).
  43. “Written” or “writing.”  Unchanged from former Section 1-201 .

The first sentence of paragraph (9) makes clear that a buyer from a pawnbroker cannot be a buyer in ordinary course of business. The second sentence explains what it means to buy “in the ordinary course.” The penultimate sentence prevents a buyer that does not have the right to possession as against the seller from being a buyer in ordinary course of business. Concerning when a buyer obtains possessory rights, see Sections 2-502 and 2-716. However, the penultimate sentence is not intended to affect a buyer’s status as a buyer in ordinary course of business in cases (such as a “drop shipment”) involving delivery by the seller to a person buying from the buyer or a donee from the buyer. The requirement relates to whether as against the seller the buyer or one taking through the buyer has possessory rights.

Dock warrants were within the Sales Act definition of document of title apparently for the purpose of recognizing a valid tender by means of such paper. In current commercial practice a dock warrant or receipt is a kind of interim certificate issued by shipping companies upon delivery of the goods at the dock, entitling a designated person to be issued a bill of lading. The receipt itself is invariably nonnegotiable in form although it may indicate that a negotiable bill is to be forthcoming. Such a document is not within the general compass of the definition, although trade usage may in some cases entitle such paper to be treated as a document of title. If the dock receipt actually represents a storage obligation undertaken by the shipping company, then it is a warehouse receipt within this section regardless of the name given to the instrument.

The goods must be “described,” but the description may be by marks or labels and may be qualified in such a way as to disclaim personal knowledge of the issuer regarding contents or condition. However, baggage and parcel checks and similar “tokens” of storage which identify stored goods only as those received in exchange for the token are not covered by this Article.

A document of title may be either tangible or electronic. Tangible documents of title should be construed to mean traditional paper documents. Electronic documents of title are documents that are stored in an electronic medium instead of in tangible form. The concept of an electronic medium should be construed liberally to include electronic, digital, magnetic, optical, electromagnetic, or any other current or similar emerging technologies. As to reissuing a document of title in an alternative medium, see Article 7, Section 7-105. Control for electronic documents of title is defined in Article 7 (Section 7-106).

The definition is broad enough to include an airway bill.

Over time, however, amendments to the Uniform Commercial Code brought the Article 2 merchant concept of good faith (subjective honesty and objective commercial reasonableness) into other Articles. First, Article 2A explicitly incorporated the Article 2 standard. See Section 2A-103(7). Then, other Articles broadened the applicability of that standard by adopting it for all parties rather than just for merchants. See, e.g., Sections 3-103(a)(4), 4A-105(a)(6), 8-102(a)(10), and 9-102(a)(43). All of these definitions are comprised of two elements — honesty in fact and the observance of reasonable commercial standards of fair dealing. Only revised Article 5 defines “good faith” solely in terms of subjective honesty, and only Article 6 and Article 7 are without definitions of good faith. (It should be noted that, while revised Article 6 did not define good faith, Comment 2 to revised Section 6-102 states that “this Article adopts the definition of ‘good faith’ in Article 1 in all cases, even when the buyer is a merchant.”) Given these developments, it is appropriate to move the broader definition of “good faith” to Article 1. Of course, this definition is subject to the applicability of the narrower definition in revised Article 5.

§ 8.1A-202. Notice; knowledge.

  1. Subject to subsection (f), a person has “notice” of a fact if the person:
    1. has actual knowledge of it;
    2. 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, has reason to know that it exists.
  2. “Knowledge” means actual knowledge. “Knows” has a corresponding meaning.
  3. “Discover,” “learn,” or words of similar import refer to knowledge rather than to reason to know.
  4. A person “notifies” or “gives” a notice or notification to another person by taking such steps as may be reasonably required to inform the other person in ordinary course, whether or not the other person actually comes to know of it.
  5. Subject to subsection (f), a person “receives” a notice or notification when:
    1. it comes to that person’s 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 held out by that person as the place for receipt of such communications.
  6. 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 individual’s 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 the communication is part of the individual’s regular duties or the individual has reason to know of the transaction and that the transaction would be materially affected by the information.

History. 1964, c. 219, § 8.1-201 (25)-(27); 1973, c. 509; 1984, c. 613; 1991, c. 536; 1992, c. 693; 2000, c. 1007; 2003, c. 353.

Michie’s Jurisprudence.

For related discussion, see 2A M.J. Assignments, § 25; 3C M.J. Commercial Law, §§ 16, 28.

CASE NOTES

It appears, that for purposes of holder in due course analysis, § 8.3-304 (7) implicitly supersedes that portion of the definition of “notice” contained in Article I of the Virginia U.C.C. which introduces a degree of objectivity to the concept of lack of notice. Schultz v. Wills, 126 Bankr. 489, 1991 Bankr. LEXIS 442 (Bankr. E.D. Va. 1991) (decided under prior law).

OFFICIAL COMMENT

Source: Derived from former Section 1-201 (25)-(27).

Changes from former law: These provisions are substantive rather than purely definitional. Accordingly, they have been relocated from Section 1-201 to this section. The reference to the “forgotten notice” doctrine has been deleted.

  1. Under subsection (a), a person has notice of a fact when, inter alia, the person has received a notification of the fact in question.
  2. As provided in subsection (d), the word “notifies” is used when the essential fact is the proper dispatch of the notice, not its receipt.  Compare “Send.”  When the essential fact is the other party’s receipt of the notice, that is stated.  Subsection (e) states when a notification is received.
  3. Subsection (f) makes clear that notice, knowledge, or a notification, although “received,” for instance, by a clerk in Department A of an organization, is effective for a transaction conducted in Department B only from the time when it was or should have been communicated to the individual conducting that transaction.

§ 8.1A-203. Lease distinguished from security interest.

  1. Whether a transaction in the form of a lease creates a lease or security interest is determined by the facts of each case.
  2. A transaction in the form of a lease creates a security interest if the consideration that 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 for 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 for nominal additional consideration upon compliance with the lease agreement.
  3. A transaction in the form of a lease does not create a security interest merely because:
    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;
    3. the lessee agrees to pay, with respect to the goods, taxes, insurance, filing, recording, or registration fees, or service or maintenance costs;
    4. the lessee has an option to renew the lease or to become the owner of the goods;
    5. 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
    6. 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.
  4. Additional consideration is nominal if it is less than the lessee’s reasonably predictable cost of performing under the lease agreement if the option is not exercised. Additional consideration is not nominal if:
    1. 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
    2. 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.
  5. The “remaining economic life of the goods” and “reasonably predictable” fair market rent, fair market value, or cost of performing under the lease agreement must be determined with reference to the facts and circumstances at the time the transaction is entered into.

History. 1964, c. 219, § 8.1-201 (37); 1973, c. 509; 1984, c. 613; 1991, c. 536; 1992, c. 693; 2000, c. 1007; 2003, c. 353.

CASE NOTES

Editor’s note.

Most of the cases below were decided under former Title 8.1.

Among the factors to be considered in determining if a lease is intended as a security agreement are the location of title to, or ownership rights in, the property; responsibility for maintenance, taxes, registration, etc.; placement of the risk of loss; and provision for disposition of the property at the termination of the agreement. In addition, the court must look at what the parties intended. Litton Indus. Credit Corp. v. Dunn Bros., 16 Bankr. 42, 1981 Bankr. LEXIS 2618 (Bankr. W.D. Va. 1981).

A prime factor in determining whether a contract is a lease or a security instrument is whether equity is accumulated by the agreement. Weiskotten v. Goforth Tractor, Inc., 1 Bankr. 231, 1979 Bankr. LEXIS 855 (Bankr. W.D. Va. 1979).

Any creation of equity in lessee has been held to be one of the distinctive characteristics of a lease intended for security. Amvest Funding Co. v. Rex Group, Inc., 80 Bankr. 774, 1987 Bankr. LEXIS 2137 (Bankr. E.D. Va. 1987).

If the lessee develops equity in the leased property because the purchase price is low relative to the option price, then the only sensible decision economically for the lessee is to exercise the option. In such a case, the lessor did not likely expect the return of the leased goods. In re Architectural Millwork of Va., Inc., 226 Bankr. 551, 1998 Bankr. LEXIS 1399 (Bankr. W.D. Va. 1998).

A provision requiring return of the leased property at the end of the term does not negate the possibility of the agreement being a security agreement. Litton Indus. Credit Corp. v. Dunn Bros., 16 Bankr. 42, 1981 Bankr. LEXIS 2618 (Bankr. W.D. Va. 1981).

The reservation of title in the lessor is the essence of a lease agreement. If the reservation of title is solely to secure payment of the depreciated value of the property, however, then the agreement creates a security interest. Litton Indus. Credit Corp. v. Dunn Bros., 16 Bankr. 42, 1981 Bankr. LEXIS 2618 (Bankr. W.D. Va. 1981).

Option to purchase in lease does not automatically create security interest. —

An option for the lessee to purchase the property under terms set forth in the lease does not automatically render a lease a security agreement. Litton Indus. Credit Corp. v. Dunn Bros., 16 Bankr. 42, 1981 Bankr. LEXIS 2618 (Bankr. W.D. Va. 1981).

Option to purchase for no or a nominal consideration. —

A lease with a provision for the lessee to become, or to have an option to become, the owner of the property at the end of the lease period for no additional consideration, or for a nominal consideration, is, a security agreement by statute. Litton Indus. Credit Corp. v. Dunn Bros., 16 Bankr. 42, 1981 Bankr. LEXIS 2618 (Bankr. W.D. Va. 1981).

Where the price to the lessee is much less than the fair market value of the property, then the lessor has recognized an equity in the lessee, and the lease was intended as a security instrument. Litton Indus. Credit Corp. v. Dunn Bros., 16 Bankr. 42, 1981 Bankr. LEXIS 2618 (Bankr. W.D. Va. 1981).

If a lease contains an option to purchase for no or nominal consideration, it suggests that the lessor does not care, in an economic sense, whether or not the option is exercised. In re Architectural Millwork of Va., Inc., 226 Bankr. 551, 1998 Bankr. LEXIS 1399 (Bankr. W.D. Va. 1998).

Lease-purchase agreement. —

Agreements were lease-purchase agreements and not security interests under Virginia law where agreements were for an initial period of a month, were automatically renewable with each payment, could be terminated at any time without paying any charges other than previously due, and permitted the debtors to become the owners of the subject property; accordingly, the bankruptcy court sustained the creditor’s objection to the debtors’ Chapter 13 plan that treated the agreements as security interests rather than as leases that were required to be either affirmed or rejected under 11 U.S.C.S. § 365. In re Muse, No. 02-62169-T, 2002 Bankr. LEXIS 1807 (Bankr. E.D. Va. Sept. 30, 2002).

Lease held to be security agreement. —

Where under the terms of the lease the lessor made no express or implied warranties of title, merchantability or fitness for a specific purpose and the lessee waived any such warranties, and, additionally, the lessee was required to maintain upkeep and care of the horses, procure and maintain insurance on the horses at its own expense, assume and bear the entire risk of loss or damage of the horses, pay all taxes and license and regulation fees, and file personal property tax returns and pay all taxes, assessments, fees and penalties which may be assessed on the horses, the lease agreement was actually a security agreement. Amvest Funding Co. v. Rex Group, Inc., 80 Bankr. 774, 1987 Bankr. LEXIS 2137 (Bankr. E.D. Va. 1987).

Plaintiff correctly contended that the contract provision allowing plaintiff to purchase the backhoe for $1 established, as a matter of law, that the contract was a security agreement rather than a lease. C.F. Garcia Enters., Inc. v. Enterprise Ford Tractor, Inc., 253 Va. 104 , 480 S.E.2d 497, 1997 Va. LEXIS 14 (1997).

As a matter of law, the present contract was a security agreement because it provided plaintiff with the option to purchase the backhoe for nominal consideration upon compliance with the terms of the agreement. C.F. Garcia Enters., Inc. v. Enterprise Ford Tractor, Inc., 253 Va. 104 , 480 S.E.2d 497, 1997 Va. LEXIS 14 (1997).

OFFICIAL COMMENT

Source: Former Section 1-201 (37).

Changes from former law: This section is substantively identical to those portions of former Section 1-201 (37) that distinguished ‘true’ leases from security interests, except that the definition of ‘present value’ formerly embedded in Section 1-201 (37) has been placed in Section 1-201(28).

  1. An interest in personal property or fixtures which secures payment or performance of an obligation is a “security interest.”  See Section 1-201 (37).  Security interests are sometimes created by transactions in the form of leases.  Because it can be difficult to distinguish leases that create security interests from those that do not, this section provides rules that govern the determination of whether a transaction in the form of a lease creates a security interest.
  2. One of the reasons it was decided to codify the law with respect to leases was to resolve an issue that created considerable confusion in the courts:  what is a lease?  The confusion existed, in part, due to the last two sentences of the definition of security interest in the 1978 Official Text of the Act, Section 1-201 (37).  The confusion was compounded by the rather considerable change in the federal, state and local tax laws and accounting rules as they relate to leases of goods.  The answer is important because the definition of lease determines not only the rights and remedies of the parties to the lease but also those of third parties.  If a transaction creates a lease and not a security interest, the lessee’s interest in the goods is limited to its leasehold estate; the residual interest in the goods belongs to the lessor.  This has significant implications to the lessee’s creditors.  “On common law theory, the lessor, since he has not parted with title, is entitled to full protection against the lessee’s creditors and trustee in bankruptcy . . . .”  1 G. Gilmore, Security Interests in Personal Property Section 3.6, at 76 (1965).

Under pre-UCC chattel security law there was generally no requirement that the lessor file the lease, a financing statement, or the like, to enforce the lease agreement against the lessee or any third party; the Article on Secured Transactions (Article 9) did not change the common law in that respect. Coogan, Leasing and the Uniform Commercial Code, in Equipment Leasing — Leveraged Leasing 681, 700 n.25, 729 n.80 (2d ed.1980). The Article on Leases (Article 2A) did not change the law in that respect, except for leases of fixtures. Section 2A-309. An examination of the common law will not provide an adequate answer to the question of what is a lease. The definition of security interest in Section 1-201 (37) of the 1978 Official Text of the Act provided that the Article on Secured Transactions (Article 9) governs security interests disguised as leases, i.e. , leases intended as security; however, the definition became vague and outmoded.

Lease is defined in Article 2A as a transfer of the right to possession and use of goods for a term, in return for consideration. Section 2A-103(1)(j). The definition continues by stating that the retention or creation of a security interest is not a lease. Thus, the task of sharpening the line between true leases and security interests disguised as leases continues to be a function of this Article.

This section begins where Section 1-201 (35) leaves off. It draws a sharper line between leases and security interests disguised as leases to create greater certainty in commercial transactions.

Prior to enactment of the rules now codified in this section, the 1978 Official Text of Section 1-201 (37) provided that whether a lease was intended as security ( i.e. , a security interest disguised as a lease) was to be determined from the facts of each case; however, (a) the inclusion of an option to purchase did not itself make the lease one intended for security, and (b) an agreement that upon compliance with the terms of the lease the lessee would become, or had the option to become, the owner of the property for no additional consideration, or for a nominal consideration, did make the lease one intended for security.

Reference to the intent of the parties to create a lease or security interest led to unfortunate results. In discovering intent, courts relied upon factors that were thought to be more consistent with sales or loans than leases. Most of these criteria, however, were as applicable to true leases as to security interests. Examples include the typical net lease provisions, a purported lessor’s lack of storage facilities or its character as a financing party rather than a dealer in goods. Accordingly, this section contains no reference to the parties’ intent.

Subsections (a) and (b) were originally taken from Section 1(2) of the Uniform Conditional Sales Act (act withdrawn 1943), modified to reflect current leasing practice. Thus, reference to the case law prior to the incorporation of those concepts in this article will provide a useful source of precedent. Gilmore, Security Law, Formalism and Article 9, 47 Neb.L.Rev. 659, 671 (1968). Whether a transaction creates a lease or a security interest continues to be determined by the facts of each case. Subsection (b) further provides that a transaction creates a security interest if the lessee has an obligation to continue paying consideration for the term of the lease, if the obligation is not terminable by the lessee (thus correcting early statutory gloss, e.g., In re Royer’s Bakery, Inc. , 1 U.C.C. Rep.Serv. (Callaghan) 342 (Bankr. E.D.Pa.1963)) and if one of four additional tests is met. The first of these four tests, subparagraph (1), is that the original lease term is equal to or greater than the remaining economic life of the goods. The second of these tests, subparagraph (2), is that the lessee is either bound to renew the lease for the remaining economic life of the goods or to become the owner of the goods. In re Gehrke Enters. , 1 Bankr. 647, 651-52 (Bankr. W.D.Wis.1979). The third of these tests, subparagraph (3), is whether the lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration, which is defined later in this section. In re Celeryvale Transp. , 44 Bankr. 1007, 1014-15 (Bankr. E.D.Tenn.1984). The fourth of these tests, subparagraph (4), is whether the lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration. All of these tests focus on economics, not the intent of the parties. In re Berge , 32 Bankr. 370, 371-73 (Bankr. W.D.Wis.1983).

The focus on economics is reinforced by subsection (c). It states that a transaction does not create a security interest merely because the transaction has certain characteristics listed therein. Subparagraph (1) has no statutory derivative; it states that a full payout lease does not per se create a security interest. Rushton v. Shea , 419 F. Supp. 1349, 1365 (D.Del.1976). Subparagraphs (2) and (3) provide the same regarding the provisions of the typical net lease. Compare All-States Leasing Co. v. Ochs , 42 Or.App. 319, 600 P.2d 899 (Ct.App.1979), with In re Tillery , 571 F.2d 1361 (5th Cir.1978). Subparagraph (4) restates and expands the provisions of the 1978 Official Text of Section 1-201 (37) to make clear that the option can be to buy or renew. Subparagraphs (5) and (6) treat fixed price options and provide that fair market value must be determined at the time the transaction is entered into. Compare Arnold Mach. Co. v. Balls , 624 P.2d 678 (Utah 1981), with Aoki v. Shepherd Mach. Co. , 665 F.2d 941 (9th Cir.1982).

The relationship of subsection (b) to subsection (c) deserves to be explored. The fixed price purchase option provides a useful example. A fixed price purchase option in a lease does not of itself create a security interest. This is particularly true if the fixed price is equal to or greater than the reasonably predictable fair market value of the goods at the time the option is to be performed. A security interest is created only if the option price is nominal and the conditions stated in the introduction to the second paragraph of this subsection are met. There is a set of purchase options whose fixed price is less than fair market value but greater than nominal that must be determined on the facts of each case to ascertain whether the transaction in which the option is included creates a lease or a security interest.

It was possible to provide for various other permutations and combinations with respect to options to purchase and renew. For example, this section could have stated a rule to govern the facts of In re Marhoefer Packing Co. , 674 F.2d 1139 (7th Cir.1982). This was not done because it would unnecessarily complicate the definition. Further development of this rule is left to the courts.

Subsections (d) and (e) provide definitions and rules of construction.

§ 8.1A-204. Value.

Except as otherwise provided in Titles 8.3 A, 8.4, and 8.5A, 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 under a preexisting contract for purchase; or
  4. in return for any consideration sufficient to support a simple contract.

History. 1964, c. 219, § 8.1-201 (44); 1973, c. 509; 1984, c. 613; 1991, c. 536; 1992, c. 693; 2000, c. 1007; 2003, c. 353; 2011, c. 369.

The 2011 amendments.

The 2011 amendment by c. 369 substituted “and 8.5A” for “8.5A, and 8.6A” in the introductory language.

CASE NOTES

No obligation to respond to affidavit sent prior to lawsuit. —

Section 8.1A-204 did not suggest that defendants’ failure to respond to plaintiff’s affidavits, which were sent to contest a foreclosure prior to the filing of plaintiff’s lawsuit, constituted an admission that estopped defendants from disputing assertions in the affidavits. The statutory provisions did not even suggest that defendants had any legal duty to respond to plaintiff’s affidavits or that plaintiff could create such an obligation simply by stating in a document that the obligation existed and then having the document notarized. Bryant v. Wash. Mut. Bank, 524 F. Supp. 2d 753, 2007 U.S. Dist. LEXIS 93081 (W.D. Va. 2007), aff'd, 282 Fed. Appx. 260, 2008 U.S. App. LEXIS 13249 (4th Cir. 2008).

OFFICIAL COMMENT

Source: Former Section 1-201 (44).

Changes from former law: Unchanged from former Section 1-201 , which was derived from Sections 25, 26, 27, 191, Uniform Negotiable Instruments Law; Section 76, Uniform Sales Act; Section 53, Uniform Bills of Lading Act; Section 58, Uniform Warehouse Receipts Act; Section 22(1), Uniform Stock Transfer Act; Section 1, Uniform Trust Receipts Act. These provisions are substantive rather than purely definitional. Accordingly, they have been relocated from former Section 1-201 to this section.

  1. All the Uniform Acts in the commercial law field (except the Uniform Conditional Sales Act) have carried definitions of “value.”  All those definitions provided that value was any consideration sufficient to support a simple contract, including the taking of property in satisfaction of or as security for a pre-existing claim.  Subsections (1), (2), and (4) in substance continue the definitions of “value” in the earlier acts.  Subsection (3) makes explicit that “value” is also given in a third situation:  where a buyer by taking delivery under a pre-existing contract converts a contingent into a fixed obligation.

This definition is not applicable to Articles 3 and 4, but the express inclusion of immediately available credit as value follows the separate definitions in those Articles. See Sections 4-208, 4-209, 3-303. A bank or other financing agency which in good faith makes advances against property held as collateral becomes a bona fide purchaser of that property even though provision may be made for charge-back in case of trouble. Checking credit is “immediately available” within the meaning of this section if the bank would be subject to an action for slander of credit in case checks drawn against the credit were dishonored, and when a charge-back is not discretionary with the bank, but may only be made when difficulties in collection arise in connection with the specific transaction involved.

§ 8.1A-205. Reasonable time; seasonableness.

  1. Whether a time for taking an action required by the Uniform Commercial Code is reasonable depends on the nature, purpose, and circumstances of the action.
  2. 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.

History. 1964, c. 219, § 8.1-204 (2)-(3); 2003, c. 353.

Michie’s Jurisprudence.

For related discussion, see 3C M.J. Commercial Law, § 28.

OFFICIAL COMMENT

Source: Former Section 1-204(2)-(3).

Changes from former law: This section is derived from subsections (2) and (3) of former Section 1-204 . Subsection (1) of that section is now incorporated in Section 1-302(b).

  1. Subsection (a) makes it clear that requirements that actions be taken within a “reasonable” time are to be applied in the transactional context of the particular action.
  2. Under subsection (b), the agreement that fixes the time need not be part of the main agreement, but may occur separately.  Notice also that under the definition of “agreement” (Section 1-201 ) the circumstances of the transaction, including course of dealing or usages of trade or course of performance may be material.  On the question what is a reasonable time these matters will often be important.

§ 8.1A-206. Presumptions.

Whenever the Uniform Commercial Code creates a “presumption” with respect to a fact, or provides that a fact is “presumed,” the trier of fact must find the existence of the fact unless and until evidence is introduced that supports a finding of its nonexistence.

History. 1964, c. 219, § 8.1-201 (31); 1973, c. 509; 1984, c. 613; 1991, c. 536; 1992, c. 693; 2000, c. 1007; 2003, c. 353.

OFFICIAL COMMENT

Source: Former Section 1-201 (31).

Changes from former law. None, other than stylistic changes.

  1. Several sections of the Uniform Commercial Code state that there is a “presumption” as to a certain fact, or that the fact is “presumed.”  This section, derived from the definition appearing in former Section 1-201 (31), indicates the effect of those provisions on the proof process.

PART 3. Territorial Applicability and General Rules.

§ 8.1A-301. Territorial applicability; parties’ power to choose applicable law.

  1. This section applies to a transaction to the extent that it is governed by another title of the Uniform Commercial Code.
  2. Except as otherwise provided in this section, when a transaction bears a reasonable relation to this state and also to another state or nation the parties may agree that the law either of this state or such other state or nation shall govern their rights and duties.
  3. In the absence of an agreement effective under subsection (b), the rights and obligations of the parties are determined by the law that would be selected by application of this State’s conflict of laws principles.
  4. To the extent that the Uniform Commercial Code governs a transaction, if one of the following provisions of the Uniform Commercial Code specifies the applicable law, that provision governs and a contrary agreement is effective only to the extent permitted by the law so specified:
    1. Rights of creditors against sold goods. § 8.2-402 ;
    2. Applicability of the title on leases. §§ 8.2A-105 and 8.2A-106 ;
    3. Applicability of the title on bank deposits and collections. § 8.4-102 ;
    4. Applicability of the title on funds transfers. § 8.4A-507 ;
    5. Letters of credit. § 8.5A-116 ;
    6. Applicability of the title on investment securities. § 8.8A-110 ;
    7. Law governing perfection, the effect of perfection or nonperfection, and the priority of security interests and agricultural liens. §§ 8.9A-301 through 8.9A-307 .

History. 1964, c. 219, § 8.1-105; 1973, c. 509; 1990, c. 9; 1991, c. 536; 1996, c. 216; 1997, cc. 121, 343; 2000, c. 1007; 2003, c. 353; 2011, c. 369.

The 2011 amendments.

The 2011 amendment by c. 369 deleted former subdivision (d)(6), which read: “Bulk transfers subject to the title on bulk sales. § 8.6A-103,” and redesignated former subdivisions (d)(7) and (8) as subdivisions (d)(6) and (7).

Law Review.

For note, “Choice of Law Stipulations by Litigants,” see 43 Wash. & Lee L. Rev. 141 (1986).

Michie’s Jurisprudence.

For related discussion, see 3C M.J. Commercial Law, §§ 6, 24, 36, 98.

Research References.

Virginia Forms (Matthew Bender). No. 8A-201 Variation from Uniform Commercial Code by Agreement.

CASE NOTES

Editor’s note.

The cases below were decided under former Title 8.1.

Applicable doctrine in absence of agreement. —

The Uniform Commercial Code generally has adopted the conflict of laws doctrine that, absent an agreement between the parties as to the law governing their rights and duties, the court should apply the law of the jurisdiction where material contacts are centered. Ingersoll-Rand Fin. Corp. v. Nunley, 11 Bankr. 528, 1981 U.S. Dist. LEXIS 12417 (W.D. Va. 1981).

Under Virginia law, the law of the place of performance governs questions concerning the performance of a contract. Madaus v. November Hill Farm, Inc., 630 F. Supp. 1246, 1986 U.S. Dist. LEXIS 27700 (W.D. Va. 1986).

The place of performance of a sales contract is usually considered to be the place where goods are delivered. Madaus v. November Hill Farm, Inc., 630 F. Supp. 1246, 1986 U.S. Dist. LEXIS 27700 (W.D. Va. 1986).

Under this section the parties’ choice of law will control provided that the transaction in which they have been engaged bears a reasonable relationship to the state chosen. Island Creek Coal Co. v. Lake Shore, Inc., 636 F. Supp. 285, 1986 U.S. Dist. LEXIS 25075 (W.D. Va. 1986), aff'd in part and rev'd in part, 832 F.2d 274, 1987 U.S. App. LEXIS 14223 (4th Cir. 1987).

Law of the place of car accident applicable. —

Where an accident involving an automobile bought and sold in New Jersey occurred in Virginia, the law of the place of the accident has an appropriate relation to the transaction as to make the law of the place of the accident the controlling law. Bilancia v. GMC, 538 F.2d 621, 1976 U.S. App. LEXIS 7800 (4th Cir. 1976).

Place of automobile accident as controlling choice of law as to breach of warranty. —

Absent any agreement of the parties to the contrary, the law of the place of an automobile accident has such an appropriate relation to the transaction as to make the law of the place of the accident the controlling law as to breach of warranty. White v. American Motors Sales Corp., 550 F. Supp. 1287, 1982 U.S. Dist. LEXIS 15910 (W.D. Va. 1982), aff'd, 714 F.2d 135 (4th Cir. 1983).

Application of attorney lien statute. —

Since the settlement and work done by attorney was conducted in Virginia, the Virginia lien statute, § 54.1-3932 , should apply to attorney’s claim of his attorney lien against the note. Military Circle Pet Ctr. #94, Inc. v. Docktor Pet Holdings, Ltd., 181 Bankr. 282, 1994 Bankr. LEXIS 2144 (Bankr. E.D. Va. 1994).

“Appropriate relation” found. —

Although contract for manufacture of concrete transfer car was made in Michigan as was the car itself, the car was built for use in Virginia, manufacturer supervised its installation in the State, and accident involving it occurred in the State, thus, giving the transaction “an appropriate relation” to Virginia. Accordingly, Virginia law applied to the product liability action. Besser Co. v. Hansen, 243 Va. 267 , 415 S.E.2d 138, 8 Va. Law Rep. 2179, 1992 Va. LEXIS 14 (1992).

OFFICIAL COMMENT

Source: Former Section 1-105.

Summary of changes from former law: Section 1-301 , which replaces former Section 1-105, represents a significant rethinking of choice of law issues addressed in that section. The new section reexamines both the power of parties to select the jurisdiction whose law will govern their transaction and the determination of the governing law in the absence of such selection by the parties. With respect to the power to select governing law, the draft affords greater party autonomy than former Section 1-105, but with important safeguards protecting consumer interests and fundamental policies.

Section 1-301 addresses contractual designation of governing law somewhat differently than does former Section 1-105. Former law allowed the parties to any transaction to designate a jurisdiction whose law governs if the transaction bears a “reasonable relation” to that jurisdiction. Section 1-301 deviates from this approach by providing different rules for transactions involving a consumer than for non-consumer transactions, such as “business to business” transactions.

In the context of consumer transactions, the language of Section 1-301 , unlike that of former Section 1-105, protects consumers against the possibility of losing the protection of consumer protection rules applicable to the aspects of the transaction governed by the Uniform Commercial Code. In most situations, the relevant consumer protection rules will be those of the consumer’s home jurisdiction. A special rule, however, is provided for certain face-to-face sales transactions. (See Comment 3).

In the context of business-to-business transactions, Section 1-301 generally provides the parties with greater autonomy to designate a jurisdiction whose law will govern than did former Section 1-105, but also provides safeguards against abuse that did not appear in former Section 1-105. In the non-consumer context, following emerging international norms, greater autonomy is provided in subsections (c)(1) and (c)(2) by deleting the former requirement that the transaction bear a “reasonable relation” to the jurisdiction. In the case of wholly domestic transactions, however, the jurisdiction designated must be a State. (See Comment 4).

An important safeguard not present in former Section 1-105 is found in subsection (f). Subsection (f) provides that the designation of a jurisdiction’s law is not effective (even if the transaction bears a reasonable relation to that jurisdiction) to the extent that application of that law would be contrary to a fundamental policy of the jurisdiction whose law would govern in the absence of contractual designation. Application of the law designated may be contrary to a fundamental policy of the State or country whose law would otherwise govern either because of the nature of the law designated or because of the “mandatory” nature of the law that would otherwise apply. (See Comment 6).

In the absence of an effective contractual designation of governing law, former Section 1-105(1) directed the forum to apply its own law if the transaction bore “an appropriate relation to this state.” This direction, however, was frequently ignored by courts. Section 1-301(d) provides that, in the absence of an effective contractual designation, the forum should apply the forum’s general choice of law principles, subject to certain special rules in consumer transactions. (See Comments 3 and 7).

  1. Applicability of section. This section is neither a complete restatement of choice of law principles nor a free-standing choice of law statute.  Rather, it is a provision of Article 1 of the Uniform Commercial Code.  As such, the scope of its application is limited in two significant ways.
  2. Contractual choice of law. This section allows parties broad autonomy, subject to several important limitations, to select the law governing their transaction, even if the transaction does not bear a relation to the State or country whose law is selected.  This recognition of party autonomy with respect to governing law has already been established in several Articles of the Uniform Commercial Code (see Sections 4A-507, 5-116, and 8-110) and is consistent with international norms.  See, e.g., Inter-American Convention on the Law Applicable to International Contracts, Article 7 (Mexico City 1994); Convention on the Law Applicable to Contracts for the International Sale of Goods, Article 7(1) (The Hague 1986); EC Convention on the Law Applicable to Contractual Obligations, Article 3(1) (Rome 1980).
  3. Consumer transactions. If one of the parties is a consumer (as defined in Section 1-201(b)(11)), subsection (e) provides the parties less autonomy to designate the State or country whose law will govern.
  4. Wholly domestic transactions. While this Section provides parties broad autonomy to select governing law, that autonomy is limited in the case of wholly domestic transactions.  In a “domestic transaction,” subsection (c)(1) validates only the designation of the law of a State. A “domestic transaction” is a transaction that does not bear a reasonable relation to a country other than the United States.  (See subsection (a)).  Thus, in a wholly domestic non-consumer transaction, parties may (subject to the limitations set out in subsections (f) and (g)) designate the law of any State but not the law of a foreign country.
  5. International transactions. This section provides greater autonomy in the context of international transactions.  As defined in subsection (a)(2), a transaction is an “international transaction” if it bears a reasonable relation to a country other than the United States.  In a non-consumer international transaction, subsection (c)(2) provides that a designation of the law of any State or country is effective (subject, of course, to the limitations set out in subsections (f) and (g)).  It is important to note that the transaction need not bear a relation to the State or country designated if the transaction is international.  Thus, for example, in a non-consumer lease of goods in which the lessor is located in Mexico and the lessee is located in Louisiana, a designation of the law of Ireland to govern the transaction would be given effect under this section even though the transaction bears no relation to Ireland.  The ability to designate the law of any country in non-consumer international transactions is important in light of the common practice in many commercial contexts of designating the law of a “neutral” jurisdiction or of a jurisdiction whose law is well-developed.  If a country has two or more territorial units in which different systems of law relating to matters within the scope of this section are applicable (as is the case, for example, in Canada and the United Kingdom), subsection (c)(2) should be applied to designation by the parties of the law of one of those territorial units.  Thus, for example, subsection (c)(2) should be applied if the parties to a non-consumer international transaction designate the laws of Ontario or Scotland as governing their transaction.
  6. Fundamental policy. Subsection (f) provides that an agreement designating the governing law will not be given effect to the extent that application of the designated law would be contrary to a fundamental policy of the State or country whose law would otherwise govern.  This rule provides a narrow exception to the broad autonomy afforded to parties in subsection (c).  One of the prime objectives of contract law is to protect the justified expectations of the parties and to make it possible for them to foretell with accuracy what will be their rights and liabilities under the contract. In this way, certainty and predictability of result are most likely to be secured.  See Restatement  (Second) Conflict of Laws, Section 187, comment e.
  7. Choice of law in the absence of contractual designation. Subsection (d), which replaces the second sentence of former Section 1-105(1), determines which jurisdiction’s law governs a transaction in the absence of an effective contractual choice by the parties.  Former Section 1-105(1) provided that the law of the forum (i.e., the Uniform Commercial Code) applied if the transaction bore “an appropriate relation to this state.”  By using an “appropriate relation” test, rather than, for example, a “most significant relationship” test,  Section 1-105(1) expressed a bias in favor of applying the forum’s law.  This bias, while not universally respected by the courts, was justifiable in light of the uncertainty that existed at the time of drafting as to whether the Uniform Commercial Code would be adopted by all the states; the pro-forum bias would assure that the Uniform Commercial Code would be applied so long as the transaction bore an “appropriate” relation to the forum.  Inasmuch as the Uniform Commercial Code has been adopted, at least in part, in all U.S. jurisdictions, the vitality of this point is minimal in the domestic context, and international comity concerns militate against continuing the pro-forum, pro-UCC bias in transnational transactions. Whether the choice is between the law of two jurisdictions that have adopted the Uniform Commercial Code, but whose law differs (because of differences in enacted language or differing judicial interpretations), or between the Uniform Commercial Code and the law of another country, there is no strong justification for directing a court to apply different choice of law principles to that determination than it would apply if the matter were not governed by the Uniform Commercial Code. Similarly, given the variety of choice of law principles applied by the states, it would not be prudent to designate only one such principle as the proper one for transactions governed by the Uniform Commercial Code. Accordingly, in cases in which the parties have not made an effective choice of law, Section 1-301(d) simply directs the forum to apply its ordinary choice of law principles to determine which jurisdiction’s law governs, subject to the special rules of Section 1-301(e)(2) with regard to consumer transactions.
  8. Primacy of other Uniform Commercial Code choice of law rules. Subsection (g), which is essentially identical to former Section 1-105(2), indicates that choice of law rules provided in the other Articles govern when applicable.
  9. Matters not addressed by this section. As noted in Comment 1, this section is not a complete statement of conflict of laws doctrines applicable in commercial cases. Among the issues this section does not address, and leaves to other law, three in particular deserve mention.  First, a forum will occasionally decline to apply the law of a different jurisdiction selected by the parties when application of that law would be contrary to a fundamental policy of the forum jurisdiction, even if it would not be contrary to a fundamental policy of the State or country whose law would govern in the absence of contractual designation. Standards for application of this doctrine relate primarily to concepts of sovereignty rather than commercial law and are thus left to the courts.  Second, in determining whether to give effect to the parties’ agreement that the law of a particular State or country will govern their relationship, courts must, of necessity, address some issues as to the basic validity of that agreement.  These issues might relate, for example, to capacity to contract and absence of duress.  This section does not address these issues.  Third, this section leaves to other choice of law principles of the forum the issues of whether, and to what extent, the forum will apply the same law to the non-UCC aspects of a transaction that it applies to the aspects of the transaction governed by the Uniform Commercial Code.

First, this section is subject to Section 1-102, which states the scope of Article 1. As that section indicates, Article 1, and the rules contained therein, apply to transactions to the extent that they are governed by one of the other Articles of the Uniform Commercial Code. Thus, this section does not apply to matters outside the scope of the Uniform Commercial Code, such as a services contract, a credit card agreement, or a contract for the sale of real estate. This limitation was implicit in former Section 1-105, and is made explicit in Section 1-301(b).

Second, subsection (g) provides that this section is subject to the specific choice of law provisions contained in other Articles of the Uniform Commercial Code. Thus, to the extent that a transaction otherwise within the scope of this section also is within the scope of one of those provisions, the rules of that specific provision, rather than of this section, apply.

The following cases illustrate these two limitations on the scope of Section 1-301 :

There are three important limitations on this party autonomy to select governing law. First, a different, and more protective, rule applies in the context of consumer transactions. (See Comment 3). Second, in an entirely domestic transaction, this section does not validate the selection of foreign law. (See Comment 4.) Third, contractual choice of law will not be given effect to the extent that application of the law designated would be contrary to a fundamental policy of the State or country whose law would be applied in the absence of such contractual designation. (See Comment 6).

This Section does not address the ability of parties to designate non-legal codes such as trade codes as the set of rules governing their transaction. The power of parties to make such a designation as part of their agreement is found in the principles of Section 1-302 . That Section, allowing parties broad freedom of contract to structure their relations, is adequate for this purpose. This is also the case with respect to the ability of the parties to designate recognized bodies of rules or principles applicable to commercial transactions that are promulgated by intergovernmental organizations such as UNCITRAL or Unidroit. See, e.g., Unidroit Principles of International Commercial Contracts.

First, in the case of a consumer transaction, subsection (e)(1) provides that the transaction must bear a reasonable relation to the State or country designated. Thus, the rules of subsection (c) allowing the parties to choose the law of a jurisdiction to which the transaction bears no relation do not apply to consumer transactions.

Second, subsection (e)(2) provides that application of the law of the State or country determined by the rules of this section (whether or not that State or country was designated by the parties) cannot deprive the consumer of the protection of rules of law which govern matters within the scope of Section 1-301 , are protective of consumers, and are not variable by agreement. The phrase “rule of law” is intended to refer to case law as well as statutes and administrative regulations. The requirement that the rule of law be one “governing a matter within the scope of this section” means that, consistent with the scope of Section 1-301 , which governs choice of law only with regard to the aspects of a transaction governed by the Uniform Commercial Code, the relevant consumer rules are those that govern those aspects of the transaction. Such rules may be found in the Uniform Commercial Code itself, as are the consumer-protective rules in Part 6 of Article 9, or in other law if that other law governs the UCC aspects of the transaction. See, for example, the rule in Section 2.403 of the Uniform Consumer Credit Code which prohibits certain sellers and lessors from taking negotiable instruments other than checks and provides that a holder is not in good faith if the holder takes a negotiable instrument with notice that it is issued in violation of that section.

With one exception (explained in the next paragraph), the rules of law the protection of which the consumer may not be deprived are those of the jurisdiction in which the consumer principally resides. The jurisdiction in which the consumer principally resides is determined at the time relevant to the particular issue involved. Thus, for example, if the issue is one related to formation of a contract, the relevant consumer protective rules are rules of the jurisdiction in which the consumer principally resided at the time the facts relevant to contract formation occurred, even if the consumer no longer principally resides in that jurisdiction at the time the dispute arises or is litigated. If, on the other hand, the issue is one relating to enforcement of obligations, then the relevant consumer protective rules are those of the jurisdiction in which the consumer principally resides at the time enforcement is sought, even if the consumer did not principally reside in that jurisdiction at the time the transaction was entered into.

In the case of a sale of goods to a consumer, in which the consumer both makes the contract and takes possession of the goods in the same jurisdiction and that jurisdiction is not the consumer’s principal residence, the rule in subsection (e)(2)(B) applies. In that situation, the relevant consumer protective rules, the protection of which the consumer may not be deprived by the choice of law rules of subsections (c) and (d), are those of the State or country in which both the contract is made and the consumer takes delivery of the goods. This rule, adapted from Section 2A-106 and Article 5 of the EC Convention on the Law Applicable to Contractual Obligations, enables a seller of goods engaging in face-to-face transactions to ascertain the consumer protection rules to which those sales are subject, without the necessity of determining the principal residence of each buyer. The reference in subsection (e)(2)(B) to the State or country in which the consumer makes the contract should not be read to incorporate formalistic concepts of where the last event necessary to conclude the contract took place; rather, the intent is to identify the state in which all material steps necessary to enter into the contract were taken by the consumer.

The following examples illustrate the application of Section 1-301(e)(2) in the context of a contractual choice of law provision:

It is important to note that subsection (e)(2) applies to all determinations of applicable law in transactions in which one party is a consumer, whether that determination is made under subsection (c) (in cases in which the parties have designated the governing law in their agreement) or subsection (d) (in cases in which the parties have not made such a designation). In the latter situation, application of the otherwise-applicable conflict of laws principles of the forum might lead to application of the laws of a State or country other than that of the consumer’s principal residence. In such a case, however, subsection (e)(2) applies to preserve the applicability of consumer protection rules for the benefit of the consumer as described above.

Under the fundamental policy doctrine, a court should not refrain from applying the designated law merely because application of that law would lead to a result different than would be obtained under the local law of the State or country whose law would otherwise govern. Rather, the difference must be contrary to a public policy of that jurisdiction that is so substantial that it justifies overriding the concerns for certainty and predictability underlying modern commercial law as well as concerns for judicial economy generally. Thus, application of the designated law will rarely be found to be contrary to a fundamental policy of the State or country whose law would otherwise govern when the difference between the two concerns a requirement, such as a statute of frauds, that relates to formalities, or general rules of contract law, such as those concerned with the need for consideration.

The opinion of Judge Cardozo in Loucks v. Standard Oil Co. of New York , 120 N.E. 198 (1918), regarding the related issue of when a state court may decline to apply the law of another state, is a helpful touchstone here:

* * *

The courts are not free to refuse to enforce a foreign right at the pleasure of the judges, to suit the individual notion of expediency or fairness. They do not close their doors, unless help would violate some fundamental principle of justice, some prevalent conception of good morals, some deep-rooted tradition of the common weal.

120 N.E. at 201-02 (citations to authorities omitted).

Application of the designated law may be contrary to a fundamental policy of the State or country whose law would otherwise govern either (i) because the substance of the designated law violates a fundamental principle of justice of that State or country or (ii) because it differs from a rule of that State or country that is “mandatory” in that it must be applied in the courts of that State or country without regard to otherwise-applicable choice of law rules of that State or country and without regard to whether the designated law is otherwise offensive. The mandatory rules concept appears in international conventions in this field, e.g. , EC Convention on the Law Applicable to Contractual Obligations, although in some cases the concept is applied to authorize the forum state to apply its mandatory rules, rather than those of the State or country whose law would otherwise govern. The latter situation is not addressed by this section. (See Comment 9).

It is obvious that a rule that is freely changeable by agreement of the parties under the law of the State or country whose law would otherwise govern cannot be construed as a mandatory rule of that State or country. This does not mean, however, that rules that cannot be changed by agreement under that law are, for that reason alone, mandatory rules. Otherwise, contractual choice of law in the context of the Uniform Commercial Code would be illusory and redundant; the parties would be able to accomplish by choice of law no more than can be accomplished under Section 1-302 , which allows variation of otherwise applicable rules by agreement. (Under Section 1-302 , the parties could agree to vary the rules that would otherwise govern their transaction by substituting for those rules the rules that would apply if the transaction were governed by the law of the designated State or country without designation of governing law.) Indeed, other than cases in which a mandatory choice of law rule is established by statute (see, e.g. , Sections 9-301 through 9-307, explicitly preserved in subsection (g)), cases in which courts have declined to follow the designated law solely because a rule of the State or country whose law would otherwise govern is mandatory are rare.

§ 8.1A-302. Variation by agreement.

  1. Except as otherwise provided in subsection (b) or elsewhere in the Uniform Commercial Code, the effect of provisions of the Uniform Commercial Code may be varied by agreement.
  2. 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.
  3. 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.

History. 1964, c. 219, §§ 8.1-102, 8.1-204; 2003, c. 353.

Law Review.

For essay, “Foreclosure of a Deed of Trust in Virginia,” see 51 U. Rich. L. Rev. 147 (2016).

Michie’s Jurisprudence.

For related discussion, see 3C M.J. Commercial Law, §§ 12, 26, 28, 99.

Research References.

Enforcement of Judgments and Liens in Virginia (Matthew Bender). Chapter 10 Foreclosure of a Deed of Trust and a UCC Security Interest. § 10.2 The Mortgage Transaction. Rendleman.

OFFICIAL COMMENT

Source: Former Sections 1-102(3)-(4) and 1-204(1).

Changes: This section combines the rules from subsections (3) and (4) of former Section 1-102 and subsection (1) of former Section 1-204 . No substantive changes are made.

  1. Subsection (a) states affirmatively at the outset that freedom of contract is a principle of the Uniform Commercial Code: “the effect” of its provisions may be varied by “agreement.”  The meaning of the statute itself must be found in its text, including its definitions, and in appropriate extrinsic aids;  it cannot be varied by agreement.  But the Uniform Commercial Code seeks to avoid the type of interference with evolutionary growth found in pre-Code cases such as Manhattan Co. v. Morgan, 242 N.Y. 38, 150 N.E. 594 (1926).  Thus, private parties cannot make an instrument negotiable within the meaning of Article 3 except as provided in Section 3-104;  nor can they change the meaning of such terms as “bona fide purchaser,” “holder in due course,” or “due negotiation,” as used in the Uniform Commercial Code. But an agreement can change the legal consequences that would otherwise flow from the provisions of the Uniform Commercial Code.  “Agreement” here includes the effect given to course of dealing, usage of trade and course of performance by Sections 1-201 and 1-303 ;  the effect of an agreement on the rights of third parties is left to specific provisions of the Uniform Commercial Code and to supplementary principles applicable under Section 1-103.  The rights of third parties under Section 9-317 when a security interest is unperfected, for example, cannot be destroyed by a clause in the security agreement.
  2. An agreement that varies the effect of provisions of the Uniform Commercial Code may do so by stating the rules that will govern in lieu of the provisions varied.  Alternatively, the parties may vary the effect of such provisions by stating that their relationship will be governed by recognized bodies of rules or principles applicable to commercial transactions. Such bodies of rules or principles may include, for example, those that are promulgated by intergovernmental authorities such as UNCITRAL or Unidroit (see, e.g., Unidroit Principles of International Commercial Contracts), or non-legal codes such as trade codes.
  3. Subsection (c) is intended to make it clear that, as a matter of drafting, phrases such as “unless otherwise agreed” have been used to avoid controversy as to whether the subject matter of a particular section does or does not fall within the exceptions to subsection (b), but absence of such words contains no negative implication since under subsection (b) the general and residual rule is that the effect of all provisions of the Uniform Commercial Code may be varied by agreement.

This principle of freedom of contract is subject to specific exceptions found elsewhere in the Uniform Commercial Code and to the general exception stated here. The specific exceptions vary in explicitness: the statute of frauds found in Section 2-201, for example, does not explicitly preclude oral waiver of the requirement of a writing, but a fair reading denies enforcement to such a waiver as part of the “contract” made unenforceable; Section 9-602, on the other hand, is a quite explicit limitation on freedom of contract. Under the exception for “the obligations of good faith, diligence, reasonableness and care prescribed by [the Uniform Commercial Code],” provisions of the Uniform Commercial Code prescribing such obligations are not to be disclaimed. However, the section also recognizes the prevailing practice of having agreements set forth standards by which due diligence is measured and explicitly provides that, in the absence of a showing that the standards manifestly are unreasonable, the agreement controls. In this connection, Section 1-303 incorporating into the agreement prior course of dealing and usages of trade is of particular importance.

Subsection (b) also recognizes that nothing is stronger evidence of a reasonable time than the fixing of such time by a fair agreement between the parties. However, provision is made for disregarding a clause which whether by inadvertence or overreaching fixes a time so unreasonable that it amounts to eliminating all remedy under the contract. The parties are not required to fix the most reasonable time but may fix any time which is not obviously unfair as judged by the time of contracting.

§ 8.1A-303. Course of performance, course of dealing, and usage of trade.

  1. 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; and
    2. 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.
  2. A “course of dealing” is a sequence of conduct concerning previous transactions 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.
  3. A “usage of trade” is any practice or method of dealing 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 must 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.
  4. 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 in the place in which part of the performance under the agreement is to occur may be so utilized as to that part of the performance.
  5. 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 must be construed whenever 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.
  6. Subject to § 8.2-209 , a course of performance is relevant to show a waiver or modification of any term inconsistent with the course of performance.
  7. Evidence of a relevant usage of trade offered by one party is not admissible unless that party has given the other party notice that the court finds sufficient to prevent unfair surprise to the other party.

History. 1964, c. 219, §§ 8.1-205, 8.2-208 ; 1991, c. 536, § 8.2A-207 ; 2003, c. 353.

Michie’s Jurisprudence.

For related discussion, see 3C M.J. Commercial Law, §§ 10, 11, 25.

CASE NOTES

Editor’s note.

Most of the cases below were decided under former Title 8.1.

Course of dealing and trade usage are not synonymous with verbal understandings, terms and conditions. Section 8.2-202 draws a distinction between supplementing a written contract by consistent additional terms and supplementing it by course of dealing or usage of trade. Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3, 1971 U.S. App. LEXIS 7419 (4th Cir. 1971).

Custom and usage cannot be invoked to create contract duties that did not previously exist or that are inconsistent with the contract. Chas. H. Tompkins Co. v. Lumbermens Mut. Cas. Co., 732 F. Supp. 1368, 1990 U.S. Dist. LEXIS 3167 (E.D. Va. 1990).

Course of dealing and usage of trade to explain or supplement contract. —

Section 8.2-202 expressly allows evidence of course of dealing or usage of trade to explain or supplement terms intended by the parties as a final expression of their agreement. When § 8.2-202 is read in light of subsection (4) of § 8.1-205 [see now subsection (e) of § 8.1A-303 ], it is clear that the test of admissibility of evidence of course of dealing or usage of the trade is not whether the contract appears on its face to be complete in every detail, but whether the proffered evidence of course of dealing and trade usage reasonably can be construed as consistent with the express terms of the agreement. Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3, 1971 U.S. App. LEXIS 7419 (4th Cir. 1971).

Although evidence of additional terms must be excluded in the interpretation of a contract in the circumstances in § 8.2-202 (b) , significantly, no similar limitation is placed on the introduction of evidence of course of dealing or usage of trade. Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3, 1971 U.S. App. LEXIS 7419 (4th Cir. 1971).

Neither the language nor the policy of the Uniform Commercial Code supports a broad exclusionary rule that where a contract appears on its face to be complete, evidence of course of dealing and usage of trade should be excluded. Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3, 1971 U.S. App. LEXIS 7419 (4th Cir. 1971).

Where a contract does not expressly state that course of dealing and usage of trade cannot be used to explain or supplement the written contract, and where the contract is silent about adjusting prices and quantities to reflect a declining market, and it neither permits nor prohibits adjustment, this neutrality provides a fitting occasion for recourse to usage of trade and prior dealing to supplement the contract and explain its terms. Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3, 1971 U.S. App. LEXIS 7419 (4th Cir. 1971).

Since the Uniform Commercial Code assigns course of dealing and trade usage unique and important roles, they should not be conclusively rejected in the interpretation of a contract by reading them into stereotyped language in the contract that makes no specific reference to them. Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3, 1971 U.S. App. LEXIS 7419 (4th Cir. 1971).

On buyer’s refusal to take delivery of goods according to the written provisions of a contract, the Uniform Commercial Code prescribes that before allowing damages, a court must first determine whether the buyer has in fact defaulted. It must do this by supplementing and explaining the agreement with evidence of trade usage and course of dealing that is consistent with the contract’s express terms under subsection (4) of § 8.1-205 [see now subsection (e) of § 8.1A-303 ], and § 8.2-202 . Faithful adherence to this mandate reflects the reality of the marketplace and avoids the overly legalistic interpretations which the Code seeks to abolish. Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3, 1971 U.S. App. LEXIS 7419 (4th Cir. 1971).

Since extrinsic evidence is admissible to supplement or explain a contract only when it is consistent with the express terms of the contract, where defendant sought the admission of the custom of the trade in order to contradict the terms of the contract, extrinsic evidence was inadmissible. Continental Ins. Co. v. City of Va. Beach, 908 F. Supp. 341, 1995 U.S. Dist. LEXIS 17890 (E.D. Va. 1995).

CIRCUIT COURT OPINIONS

Lessor’s acceptance of late payments not waiver of right to collect late fees. —

That a lessor accepted two late payments from the lessee was not a waiver of the lessor’s right to collect late charges based on the lessor’s “course of performance” under § 8.1A-303(f) , because the lease provided that any waiver of a term by the lessor would not be deemed a waiver of such term in the future. Gelles Racing, Inc. v. Ferris, 75 Va. Cir. 273, 2008 Va. Cir. LEXIS 84 (Fairfax County June 24, 2008).

Course of dealing evidence. —

Facts, combined with the course of dealings between a buyer and seller, were effective to limit the seller’s liability to the cost of replacement concrete because the prior dealings between the parties established a course of conduct under which it was clear to the buyer that the seller made a practice of disclaiming implied warranties; the buyer had a long-standing, commercial relationship with the seller and knew of the seller’s business practices when hundreds of similar transactions took place over the years between the parties. Hammond-Mitchell, Inc. v. Constr. Materials Co., 77 Va. Cir. 5, 2008 Va. Cir. LEXIS 126 (Alleghany County Apr. 28, 2008).

Course of performance not established. —

That a lessor of a race car provided a team of drivers at the lessee’s first three racing events did not create “a course of performance” under § 8.1A-303(a) that obliged it to do so at subsequent races as no such requirement was contained in the lease. Gelles Racing, Inc. v. Ferris, 75 Va. Cir. 273, 2008 Va. Cir. LEXIS 84 (Fairfax County June 24, 2008).

OFFICIAL COMMENT

Source: Former Sections 1-205 , 2-208, and Section 2A-207.

Changes from former law: This section integrates the “course of performance” concept from Articles 2 and 2A into the principles of former Section 1-205 , which deals with course of dealing and usage of trade. In so doing, the section slightly modifies the articulation of the course of performance rules to fit more comfortably with the approach and structure of former Section 1-205 . There are also slight modifications to be more consistent with the definition of “agreement” in former Section 1-201(3). It should be noted that a course of performance that might otherwise establish a defense to the obligation of a party to a negotiable instrument is not available as a defense against a holder in due course who took the instrument without notice of that course of performance.

  1. The Uniform Commercial Code rejects both the “lay-dictionary” and the “conveyancer’s” reading of a commercial agreement.  Instead the meaning of the agreement of the parties is to be determined by the language used by them and by their action, read and interpreted in the light of commercial practices and other surrounding circumstances.  The measure and background for interpretation are set by the commercial context, which may explain and supplement even the language of a formal or final writing.
  2. “Course of dealing,” as defined in subsection (b), is restricted, literally, to a sequence of conduct between the parties previous to the agreement.  A sequence of conduct after or under the agreement, however, is a “course of performance.” “Course of dealing” may enter the agreement either by explicit provisions of the agreement or by tacit recognition.
  3. The Uniform Commercial Code deals with “usage of trade” as a factor in reaching the commercial meaning of the agreement that the parties have made.  The language used is to be interpreted as meaning what it may fairly be expected to mean to parties involved in the particular commercial transaction in a given locality or in a given vocation or trade.  By adopting in this context the term “usage of trade,” the Uniform Commercial Code expresses its intent to reject those cases which see evidence of “custom” as representing an effort to displace or negate “established rules of law.”  A distinction is to be drawn between mandatory rules of law such as the Statute of Frauds provisions of Article 2 on Sales whose very office is to control and restrict the actions of the parties, and which cannot be abrogated by agreement, or by a usage of trade, and those rules of law (such as those in Part 3 of Article 2 on Sales) which fill in points which the parties have not considered and in fact agreed upon.  The latter rules hold “unless otherwise agreed” but yield to the contrary agreement of the parties.  Part of the agreement of the parties to which such rules yield is to be sought for in the usages of trade which furnish the background and give particular meaning to the language used, and are the framework of common understanding controlling any general rules of law which hold only when there is no such understanding.
  4. A usage of trade under subsection (c) must have the “regularity of observance” specified.  The ancient English tests for “custom” are abandoned in this connection. Therefore, it is not required that a usage of trade be “ancient or immemorial,” “universal,” or the like.  Under the requirement of subsection (c) full recognition is thus available for new usages and for usages currently observed by the great majority of decent dealers, even though dissidents ready to cut corners do not agree.  There is room also for proper recognition of usage agreed upon by merchants in trade codes.
  5. The policies of the Uniform Commercial Code controlling explicit unconscionable contracts and clauses (Sections 1-304 , 2-302) apply to implicit clauses that rest on usage of trade and carry forward the policy underlying the ancient requirement that a custom or usage must be “reasonable.” However, the emphasis is shifted.  The very fact of commercial acceptance makes out a prima facie case that the usage is reasonable, and the burden is no longer on the usage to establish itself as being reasonable.  But the anciently established policing of usage by the courts is continued to the extent necessary to cope with the situation arising if an unconscionable or dishonest practice should become standard.
  6. Subsection (d), giving the prescribed effect to usages of which the parties “are or should be aware,” reinforces the provision of subsection (c) requiring not universality but only the described “regularity of observance” of the practice or method.  This subsection also reinforces the point of subsection (c) that such usages may be either general to trade or particular to a special branch of trade.
  7. Although the definition of “agreement” in Section 1-201 includes the elements of course of performance, course of dealing, and usage of trade, the fact that express reference is made in some sections to those elements is not to be construed as carrying a contrary intent or implication elsewhere.  Compare Section 1-302(c).
  8. In cases of a well established line of usage varying from the general rules of the Uniform Commercial Code where the precise amount of the variation has not been worked out into a single standard, the party relying on the usage is entitled, in any event, to the minimum variation demonstrated.  The whole is not to be disregarded because no particular line of detail has been established.  In case a dominant pattern has been fairly evidenced, the party relying on the usage is entitled under this section to go to the trier of fact on the question of whether such dominant pattern has been incorporated into the agreement.
  9. Subsection (g) is intended to insure that this Act’s liberal recognition of the needs of commerce in regard to usage of trade shall not be made into an instrument of abuse.

§ 8.1A-304. Obligation of good faith.

Every contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance and enforcement.

History. 1964, c. 219, § 8.1-203; 2003, c. 353.

Michie’s Jurisprudence.

For related discussion, see 3C M.J. Commercial Law, §§ 11, 12, 15, 21, 22, 25, 99, 102.

CASE NOTES

Editor’s note.

Some of the cases below were decided under former Title 8.1.

Duty of good faith may be limited by statutes of specific application. —

Although this section provides that every contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance, to the extent that any conflict exists between this statute of general application and another section of the code of more specific application, the court must apply the statute of specific application. Halifax Corp. v. First Union Nat'l Bank, 262 Va. 91 , 546 S.E.2d 696, 2001 Va. LEXIS 74 (2001).

There can be no breach of this section in enforcing a contractual right. Albright v. Burke & Herbert Bank & Trust Co., 249 Va. 463 , 457 S.E.2d 776, 1995 Va. LEXIS 48 (1995).

When breach not possible. —

When parties to a contract create valid and binding rights, one party does not breach the UCC’s obligation of good faith by exercising such rights. Mahoney v. Nationsbank, 249 Va. 216 , 455 S.E.2d 5, 1995 Va. LEXIS 33 (1995).

Implied covenant inapplicable to contract rights. —

When parties to a contract create valid and binding rights, an implied covenant of good faith and fair dealing is inapplicable to those rights. Generally, such a covenant cannot be the vehicle for rewriting an unambiguous contract in order to create duties that do not otherwise exist. Ward's Equip., Inc. v. New Holland N. Am., Inc., 254 Va. 379 , 493 S.E.2d 516, 1997 Va. LEXIS 114 (1997).

Failure to act in good faith not independent tort. —

While a duty of good faith and fair dealing exists under the Uniform Commercial Code (U.C.C.) as part of every commercial contract, the failure to act in good faith under former version of this section does not amount to an independent tort. The breach of the implied duty under the U.C.C. gives rise only to a cause of action for breach of contract. Charles E. Brauer Co. v. NationsBank, 251 Va. 28 , 466 S.E.2d 382, 1996 Va. LEXIS 5 (1996).

Chapter 11 debtor, a company that manufactured and sold windows, doors, trim, and millwork, alleged facts that were sufficient to overcome a bank national association’s motion to dismiss the debtor’s claims that the association committed breach of contract when it accelerated a loan, and interfered with the debtor’s business when it wrongfully injected itself into negotiations the debtor had with one of two third parties that expressed an interest in purchasing the debtor. However, the debtor was not entitled to relief on its claim that the association breached its duty of good faith under § 8.1A-304 when it attempted to collect debts the debtor owed, including its decision to notify the debtor’s creditors that they should make payments to the bank, because § 8.1A-304 did not support an independent cause of action for failure to perform its duties in good faith. Barber & Ross Co. v. Wachovia Bank Nat'l Ass'n (In re Barber & Ross Co.), No. 07-50546, No. 09-05083, 2010 Bankr. LEXIS 6293 (Bankr. W.D. Va. Apr. 5, 2010).

Chapter 7 debtor suffered dismissal with prejudice of claims in an adversary complaint against a bank to the effect that the bank had breached some obligation of good faith by refusing to renegotiate the terms of certain mortgages because § 8.1A-304 , which provides that every contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance and enforcement, did not support an independent cause of action. Reynolds Living Trust v. Wells Fargo Bank, N.A. (In re Reynolds), No. 09-71964, No. 11-07012, 2011 Bankr. LEXIS 3352 (Bankr. W.D. Va. Sept. 6, 2011).

CIRCUIT COURT OPINIONS

Applicability. —

Statute was inapplicable to the deeds of trust at issue because the creation and transfer of interests in real property were not governed by the Uniform Commercial Code; mortgagors’ counterclaim specifically alleged a breach of an implied covenant of good faith and fair dealing “under common law,” rather than the obligation prescribed by the statute. Southern Bank & Trust Co. v. Woodhouse, 92 Va. Cir. 402, 2016 Va. Cir. LEXIS 81 (Norfolk May 26, 2016).

Failure to act in good faith not independent tort. —

Virginia Supreme Court has held that, while a duty of good faith and fair dealing exists under the Uniform Commercial Code (UCC) as part of every commercial contract, the failure to act in good faith does not amount to an independent tort; the breach of the implied duty under the UCC gives rise only to a cause of action for breach of contract, and there is no support for such a duty, nor an independent tort based on its breach, at common law. Allaun v. Scott, 59 Va. Cir. 461, 2002 Va. Cir. LEXIS 360 (Norfolk Sept. 19, 2002).

Failure to act in good faith in secured transaction. —

Because a guarantor alleged that the transactions involved in a commercial financial agreement were secured transactions with a security interest, he sufficiently alleged that the implied duty of good faith was applicable. The guarantor alleged that the transactions formed the bargain of the parties in fact, and provided for the bank’s interest in personal property in exchange for financing arrangements. Wachovia Bank, N.A. v. Ranson Tyler Chevrolet, L.L.C., 73 Va. Cir. 143, 2007 Va. Cir. LEXIS 43 (Roanoke Mar. 27, 2007).

Bad faith found. —

Court found that plaintiff corporation’s principal acted in bad faith in his dealings with defendant; among other things, the principal engaged in discussions and actions to undermine the sample approval process and to divert a proposed contract. Umbrella Corp. Weapons Research Grp. v. AGF Defcom, Inc., 106 Va. Cir. 410, 2020 Va. Cir. LEXIS 487 (Virginia Beach Dec. 18, 2020).

OFFICIAL COMMENT

Source: Former Section 1-203 .

Changes from former law: Except for changing the form of reference to the Uniform Commercial Code, this section is identical to former Section 1-203 .

  1. This section sets forth a basic principle running throughout the Uniform Commercial Code.  The principle is that in commercial transactions good faith is required in the performance and enforcement of all agreements or duties. While this duty is explicitly stated in some provisions of the Uniform Commercial Code, the applicability of the duty is broader than merely these situations and applies generally, as stated in this section, to the performance or enforcement of every contract or duty within this Act.  It is further implemented by Section 1-303 on course of dealing, course of performance, and usage of trade.  This section does not support an independent cause of action for failure to perform or enforce in good faith.  Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power.  This distinction makes it clear that the doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced, and does not create a separate duty of fairness and reasonableness which can be independently breached.
  2. “Performance and enforcement” of contracts and duties within the Uniform Commercial Code include the exercise of rights created by the Uniform Commercial Code.

§ 8.1A-305. Remedies to be liberally administered.

  1. The remedies provided by the Uniform Commercial Code 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 damages nor penal damages may be had except as specifically provided in the Uniform Commercial Code or by other rule of law.
  2. Any right or obligation declared by the Uniform Commercial Code is enforceable by action unless the provision declaring it specifies a different and limited effect.

History. 1964, c. 219, § 8.1-106; 2003, c. 353.

Michie’s Jurisprudence.

For related discussion, see 3C M.J. Commercial Law, §§ 31, 32, 36.

CASE NOTES

Editor’s note.

The cases below were decided under former Title 8.1.

Punitive damages given only if tort established. —

Where buyer of an air compressor damages stemmed from seller’s contractual breach of warranty, and not from alleged tort of fraud, no punitive damages were awarded since punitive damages award must be based upon finding of actual damages in tort. Cancun Adventure Tours, Inc. v. Underwater Designer Co., 862 F.2d 1044, 1988 U.S. App. LEXIS 16367 (4th Cir. 1988).

Capping damages at contract price. —

Where defendant claimed that plaintiff was seeking excessive damages and asked the court to limit plaintiff’s damages to no more than the contract price of the furnace, there was no reason to cap plaintiff’s possible damages at the contract price, and defendant’s request was denied. Fournier Furniture, Inc. v. Waltz-Holst Blow Pipe Co., 980 F. Supp. 187, 1997 U.S. Dist. LEXIS 17381 (W.D. Va. 1997).

OFFICIAL COMMENT

Source: Former Section 1-106.

Changes from former law: Other than changes in the form of reference to the Uniform Commercial Code, this section is identical to former Section 1-106.

  1. Subsection (a) is intended to effect three propositions.  The first is to negate the possibility of unduly narrow or technical interpretation of remedial provisions by providing that the remedies in the Uniform Commercial Code are to be liberally administered to the end stated in this section.  The second is to make it clear that compensatory damages are limited to compensation.  They do not include consequential or special damages, or penal damages;  and the Uniform Commercial Code elsewhere makes it clear that damages must be minimized. Cf. Sections 1-304 , 2-706(1), and 2-712(2).  The third purpose of subsection (a) is to reject any doctrine that damages must be calculable with mathematical accuracy.  Compensatory damages are often at best approximate:  they have to be proved with whatever definiteness and accuracy the facts permit, but no more.  Cf. Section 2-204(3).
  2. Under subsection (b), any right or obligation described in the Uniform Commercial Code is enforceable by action, even though no remedy may be expressly provided, unless a particular provision specifies a different and limited effect.  Whether specific performance or other equitable relief is available is determined not by this section but by specific provisions and by supplementary principles.  Cf. Sections 1-103, 2-716.
  3. “Consequential” or “special” damages and “penal” damages are not defined in the Uniform Commercial Code; rather, these terms are used in the sense in which they are used outside the Uniform Commercial Code.

§ 8.1A-306. 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.

History. Code 1950, §§ 6-472, 6-473, 6-475; 1964, c. 219, § 8.1-107; 2003, c. 353.

Michie’s Jurisprudence.

For related discussion, see 3C M.J. Commercial Law, §§ 25, 31.

OFFICIAL COMMENT

Source: Former Section 1-107.

Changes from former law: This section changes former law in two respects. First, former Section 1-107, requiring the “delivery” of a “written waiver or renunciation” merges the separate concepts of the aggrieved party’s agreement to forego rights and the manifestation of that agreement. This section separates those concepts, and explicitly requires agreement of the aggrieved party. Second, the revised section reflects developments in electronic commerce by providing for memorialization in an authenticated record. In this context, a party may “authenticate” a record by (i) signing a record that is a writing or (ii) attaching to or logically associating with a record that is not a writing an electronic sound, symbol or process with the present intent to adopt or accept the record. See Sections 1-201(b)(37) and 9-102(a)(7).

  1. This section makes consideration unnecessary to the effective renunciation or waiver of rights or claims arising out of an alleged breach of a commercial contract where the agreement effecting such renunciation is memorialized in a record authenticated by the aggrieved party.  Its provisions, however, must be read in conjunction with the section imposing an obligation of good faith.  (Section 1-304 ).

§ 8.1A-307. Prima facie evidence by third-party documents.

A document 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 document by the third party.

History. 1964, c. 219, § 8.1-202; 2003, c. 353.

OFFICIAL COMMENT

Source: Former Section 1-202 .

Changes from former law: Except for minor stylistic changes, this Section is identical to former Section 1-202 .

  1. This section supplies judicial recognition for documents that are relied upon as trustworthy by commercial parties.
  2. This section is concerned only with documents that have been given a preferred status by the parties themselves who have required their procurement in the agreement, and for this reason the applicability of the section is limited to actions arising out of the contract that authorized or required the document.  The list of documents is intended to be illustrative and not exclusive.
  3. The provisions of this section go no further than establishing the documents in question as prima facie evidence and leave to the court the ultimate determination of the facts where the accuracy or authenticity of the documents is questioned.  In this connection the section calls for a commercially reasonable interpretation.
  4. Documents governed by this section need not be writings if records in another medium are generally relied upon in the context.

§ 8.1A-308. Performance or acceptance under reservation of rights.

  1. 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.
  2. Subsection (a) does not apply to an accord and satisfaction.

History. 1964, c. 219, § 8.1-207; 1992, c. 693; 2003, c. 353.

Michie’s Jurisprudence.

For related discussion, see 3C M.J. Commercial Law, §§ 21, 27.

CASE NOTES

Section has no effect on common law doctrine of accord and satisfaction. —

Neither this section nor the comments thereto make any mention of displacing the common-law rules of accord and satisfaction, thus, the section has no effect on the doctrine of accord and satisfaction, which requires the replacement of the old agreement with a new contract of compromise. John Grier Constr. Co. v. Jones Welding & Repair, Inc., 238 Va. 270 , 383 S.E.2d 719, 6 Va. Law Rep. 385, 1989 Va. LEXIS 144 (1989) (decided under prior law).

CIRCUIT COURT OPINIONS

Accord and satisfaction. —

Although courts used to hold pursuant to § 8.1-207 that a payee’s endorsement of a check with notation of “Amount in dispute” reserved rights which survived the negotiation of a tendered check, the addition in that statute that the statute did not apply to an accord and satisfaction meant the security company’s attempt to reserve its rights where it cashed the electrical contractor’s check by putting that language in it was a nullity as the electrical contractor’s marking of payment “in full” on the check meant the check was an accord and satisfaction which did not allow any rights to be reserved. Omni Alarm Sys. v. MCI Elec. Co., 58 Va. Cir. 264, 2002 Va. Cir. LEXIS 146 (Warren County Feb. 26, 2002) (decided under prior law).

OFFICIAL COMMENT

Source: Former Section 1-207 .

Changes from former law: This section is identical to former Section 1-207 .

  1. This section provides machinery for the continuation of performance along the lines contemplated by the contract despite a pending dispute, by adopting the mercantile device of going ahead with delivery, acceptance, or payment “without prejudice,” “under protest,” “under reserve,” “with reservation of all our rights,” and the like.  All of these phrases completely reserve all rights within the meaning of this section.  The section therefore contemplates that limited as well as general reservations and acceptance by a party may be made “subject to satisfaction of our purchaser,” “subject to acceptance by our customers,” or the like.
  2. This section does not add any new requirement of language of reservation where not already required by law, but merely provides a specific measure on which a party can rely as that party makes or concurs in any interim adjustment in the course of performance.  It does not affect or impair the provisions of this Act such as those under which the buyer’s remedies for defect survive acceptance without being expressly claimed if notice of the defects is given within a reasonable time.  Nor does it disturb the policy of those cases which restrict the effect of a waiver of a defect to reasonable limits under the circumstances, even though no such reservation is expressed.

The section is not addressed to the creation or loss of remedies in the ordinary course of performance but rather to a method of procedure where one party is claiming as of right something which the other believes to be unwarranted.

Subsection (b) states that this section does not apply to an accord and satisfaction. Section 3-311 governs if an accord and satisfaction is attempted by tender of a negotiable instrument as stated in that section. If Section 3-311 does not apply, the issue of whether an accord and satisfaction has been effected is determined by the law of contract. Whether or not Section 3-311 applies, this section has no application to an accord and satisfaction.

§ 8.1A-309. Option to accelerate at will.

A term providing that one party or that party’s successor in interest may accelerate payment or performance or require collateral or additional collateral “at will” or when the party “deems itself insecure,” or words of similar import, means 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.

History. 1964, c. 219, § 8.1-208; 1974, c. 572; 2003, c. 353.

Michie’s Jurisprudence.

For related discussion, see 3C M.J. Commercial Law, § 102.

CASE NOTES

Loan terms controlled by written instruments. —

When the original promissory note and all subsequent modifications clearly stated that the written documents were the “final, complete and entire agreement” between the parties, any oral agreements not to call a demand note for a certain time frame or until a specified event contradict the very nature of a demand instrument. Thus, in an action on the promissory note, the loan terms were controlled by the written instruments, executed by both parties. Dominion Bank v. Moore, 688 F. Supp. 1084, 1988 U.S. Dist. LEXIS 7764 (W.D. Va. 1988) (decided under prior law).

OFFICIAL COMMENT

Source: Former Section 1-208 .

Changes from former law: Except for minor stylistic changes, this section is identical to former Section 1-208 .

  1. The common use of acceleration clauses in many transactions governed by the Uniform Commercial Code, including sales of goods on credit, notes payable at a definite time, and secured  transactions, raises an issue as to the effect to be given to a clause that seemingly grants the power to accelerate at the whim and caprice of one party. This section is intended to make clear that despite language that might be so construed and which further might be held to make the agreement void as against public policy or to make the contract illusory or too indefinite for enforcement, the option is to be exercised only in the good faith belief that the prospect of payment or performance is impaired.

Obviously this section has no application to demand instruments or obligations whose very nature permits call at any time with or without reason. This section applies only to an obligation of payment or performance which in the first instance is due at a future date.

§ 8.1A-310. Subordinated obligations.

An obligation may be issued as subordinated to performance of another obligation of the person obligated, or a creditor may subordinate its right to performance of an obligation by agreement with either the person obligated or another creditor of the person obligated. Subordination does not create a security interest as against either the common debtor or a subordinated creditor.

History. 2003, c. 353.

OFFICIAL COMMENT

Source: Former Section 1-209 .

Changes from former law: This section is substantively identical to former Section 1-209 . The language in that section stating that it “shall be construed as declaring the law as it existed prior to the enactment of this section and not as modifying it” has been deleted.

  1. Billions of dollars of subordinated debt are held by the public and by institutional investors.  Commonly, the subordinated debt is subordinated on issue or acquisition and is evidenced by an investment security or by a negotiable or non-negotiable note.  Debt is also sometimes subordinated after it arises, either by agreement between the subordinating creditor and the debtor, by agreement between two creditors of the same debtor, or by agreement of all three parties.  The subordinated creditor may be a stockholder or other “insider” interested in the common debtor;  the subordinated debt may consist of accounts or other rights to payment not evidenced by any instrument.  All such cases are included in the terms “subordinated obligation,” “subordination,” and “subordinated creditor.”
  2. Subordination agreements are enforceable between the parties as contracts;  and in the bankruptcy of the common debtor dividends otherwise payable to the subordinated creditor are turned over to the superior creditor.  This “turn-over” practice has on occasion been explained in terms of “equitable lien,” “equitable assignment,” or “constructive trust,” but whatever the label the practice is essentially an equitable remedy and does not mean that there is a transaction “that creates a security interest in personal property . . . by contract” or a “sale of accounts, chattel paper, payment intangibles, or promissory notes” within the meaning of Section 9-109.  On the other hand, nothing in this section prevents one creditor from assigning his rights to another creditor of the same debtor in such a way as to create a security interest within Article 9, where the parties so intend.
  3. The enforcement of subordination agreements is largely left to supplementary principles under Section 1-103.  If the subordinated debt is evidenced by a certificated security, Section 8-202(a) authorizes enforcement against purchasers on terms stated or referred to on the security certificate.  If the fact of subordination is noted on a negotiable instrument, a holder under Sections 3-302 and 3-306 is subject to the term because notice precludes him from taking free of the subordination.  Sections 3-302(3)(a), 3-306, and 8-317 severely limit the rights of levying creditors of a subordinated creditor in such cases.