Jenkins, Sarah Howard

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University of Arkansas at Little Rock: UALR Bowen Law Repository

University of Arkansas at Little Rock William H. Bowen School of LawBowen Law Repository: Scholarship & ArchivesFaculty Scholarship2006Contracting Out of the UCCSarah Howard JenkinsUniversity of Arkansas at Little Rock William H. Bowen School of Law, shjenkins@ualr.eduFollow this and additional works at: http://lawrepository.ualr.edu/faculty_scholarshipPart of the Commercial Law Commons, and the Contracts CommonsThis Article is brought to you for free and open access by Bowen Law Repository: Scholarship & Archives. It has been accepted for inclusion in FacultyScholarship by an authorized administrator of Bowen Law Repository: Scholarship & Archives. For more information, please contactmmserfass@ualr.edu.Recommended CitationSarah Howard Jenkins, Contracting Out of the UCC, 40 Loy. L.A. L. Rev. 1 (2006).CONTRACTING OUT OF THE UCCINTRODUCTIONSarah Howard Jenkins*During the mid-forties and fifties, Karl Llewellyn and his coterieof drafters labored to produce a commercial code that would simplifyand unify commercial law among the States. The effect of these twogoals produces a tension with a historically strong competing publicpolicy in our jurisprudence of freedom of contracting. The Coderecognizes the expansion of commercial practices by agreement asan underlying purpose that drives a court's construction of theUniform Commercial Code. However, it is the expansion ofcommercial practices that is to be fostered by the construction of theCode. Freedom of contracting is merely the methodology forexpanding those practices. The freedom of contracting parties todefine legal relations within the Code's ambit is restricted. Thequestion of the degree of restriction on party autonomy and theethical limitations on approaches to minimizing the effect of theCode on contractual relations was posed to UCC scholars andpractitioners at several recent meetings of the Business Law Sectionof the American Bar Association. This scholarly discourse led to thiscompilation of manuscripts on Contracting Out of the UCC. Thiscollection of articles and essays addresses the complications,limitations, and approaches to opting-out of or contracting out of thelegal standards and norms articulated in the substantive Articles ofthe Uniform Commercial Code and the implications of suchprocesses upon the general law of contract.Focusing on mass marketing transactions, Professor WilliamWoodward' in his thoughtful submission, Constraining Opt-Outs:Shielding Local Law and Those It Protects from Adhesive Choice of* Charles C. Baum Distinguished Professor of Law, University of Arkansas at Little Rock,William H. Bowen School of Law.1. William J. Woodward, Jr., Professor of Law, Temple University.LOYOLA OF LOS ANGELES LAW REVIEWLaw Clauses,2 asks the essential question of whether the law "shouldpermit parties to substitute for the ordinarily applicable law adifferent set of rules of their own choosing." His concern is whethervendors, using adhesion contracts, impose a choice of law term orchoice of forum clause or both and strip the non-drafting purchasersof protections designed by their legislatures to minimize abusivebusiness tactics. Professor Woodward initially proposes an ana-lytical framework to be utilized by the parties and the courts fordetermining the enforceability of such terms. He posits that theforum court must, in the first instance, determine the law applicableto the transaction by employing its choice of law rules; second,address the contract law question of the enforceability of the choiceof law term pursuant to the predetermined applicable law insuringthat contract law defenses such as unconscionability and thereasonable expectation test are applied; and, assuming the termsurvives the contract law scrutiny, the forum court must determinewhether the transaction is reasonably related to the designated stateand whether the application of the designated state's laws violate afundamental policy of the state whose law would otherwise beapplicable. Despite his convincing rationale, Professor Woodwardrejects this approach and calls for the adoption of a Federal Choice ofLaw rule to shield the "rich diversity of State protective law"3 and toprevent a perversion of our Constitutional system by vendors whodesignate one state's law to govern citizens nationwide in massmarketing transactions.' Until his proposal becomes a reality, hewillingly accepts as the most immediate panacea the adoption ofstate shield laws to protect consumers and small businesses that lackthe resources to negotiate or to acquire information on the value ofthe imposed choice of law provision.In the same vein, Charles Knapp,5 an elder statesman of contractlaw and theory, in his essay Opting Out or Copping Out: AnArgument for Strict Scrutiny of Individual Contracts6 sounds aclarion call for reevaluating the mechanical application of Modern2. William J. Woodward, Constraining Opt-Outs: Shielding Local Law and Those ItProtects from Adhesive Choice of Law Clauses, 40 Loy. L.A. L. Rev. 7, 92 (2007).3. Id.4. Id. at 83-84, 92.5. Joseph W. Cotchett Distinguished Professor of Law, UC Hastings College of the Law.6. 40 Loy. L.A. L. Rev. 95 (2007).[Vol. 40:1lINTRODUCTIONContract Law, mid-Twentieth Century--"circa 1980," doctrines andprinciples such as assent, the duty to read, and the parol evidencerule to Post Modem, Twentieth-first Century, contracting modes andprocesses of individual contracts, drafter-dominated contractsbetween commercial enterprises such as employers or mass marketsellers and flesh and blood individuals.7 Given the depersonalizationof the contractual relationship and the ability of the drafter to wieldunrestrained bargaining power, he argues, the issue is not one offreedom of contract or freedom from contract but the legitimacy ofthe drafter's ability to effectively negate the fundamental principlesthat inure to individual members of our democratic society without abargain, as defined circa 1980. The fundamental principles that hedesires to insure include the right to a jury trial, the availability of aclass action, and the accessibility of a court of law. These rights maybe negated through the union of a choice of law designation, choiceof forum, and the imposition of an agreement to arbitrate. ProfessorKnapp concludes his impassioned essay positing as the remedy thejudicial redefinition or reevaluation of the contract doctrine of assentand unconscionability based on context or the "strict scrutiny" ofstandardized individual contracts.Addressing the same concerns raised by Professors Woodwardand Knapp but using as her subject UCC Article 2A consumer leases,Professor Irma Russell8 engages in an economic assessment of boththe policies underlying UCC default provisions in general andspecifically those of Article 2A and the enforceability of massmarketed adhesion contracts.9  Her thesis, that the system ofrestrained judicial oversight that insulates true bargains fromgovernmental control should not be extended to standardizedconsumer contracts, is supported by her empirical research of theprevailing terms offered and enforced by the 10 major nationalconsumer automobile rental agencies. Each of these agencies, shefound, employs a form lease offering terms and conditions on anationwide basis. Russell recognizes that 2A eliminates two of the7. Charles L. Knapp, Opting Out or Copping Out? An Argument for Strict Scrutiny ofIndividual Contracts, 40 LOy. L.A. L. REV. 95 (2007).8. Professor of Law and Director, National Energy-Environmental Law & Policy Institute(NELPI), University of Tulsa.9. Irma S. Russell, Got Wheels?: Article 2A, Standardized Rental Car Terms, RationalInaction, and Unilateral Private Ordering, 40 LOY. L.A. L. REV. 137 (2007).Fall 2006]LOYOLA OF LOS ANGELES LAW REVIEWthree potentially offending terms, choice of law and choice of forum,that both Woodward and Knapp view as coalescing with arbitrationfor maximum impact of drafter domination and thus Article 2Aprovides greater protection than is available for sales or serviceagreements. However, the scrivener's ability to impose an arbi-tration term and to vary other default provisions support herconclusion for the need to moderate the prevailing tests for theenforceability of contract terms.In his article, Is Arbitration Lawless?,'" Professor ChristopherDrahozal" delves into available empirical data to determine if claimsby leading commentators, including Professor Knapp, that arbitrationis lawless are indeed valid. He begins his assessment with a focuseddefinition of lawlessness; he then delineates the available data andcontrasts the conduct of arbitrators with that of judges and juriesbefore reaching his conclusion that arbitrator conduct and theirresolution of disputes are indistinguishable from that of judges andjuries.Professor Emeritus Fred Miller,'2 immediate past president ofthe National Conference of Commissioners on Uniform State Laws,questions the wisdom of opting out of the UCC for a transactionwithin its scope given the confusion and complexity of the commonlaw that codification of the UCC was designed to rectify.' 3Concomitantly, he inquires whether it is wisdom to opt into the UCCif the statute was not designed for the transaction under consid-eration. Here, he specifically identifies software licensing. Althoughrecognizing existing statutory and commentary support for optinginto the various UCC articles, he advises caution in his article,Writing Your Own Rules: Contracting Out of (and Into) the UniformCommercial Code; Intrastate Choice of Law.14  For transactionswithin the UCC, Professor Miller offers as an alternative toagreements varying non-mandatory provisions or agreements desig-nating another jurisdiction's law, the designation of intrastate law,10. 40 LoY. L.A. L. REV. 187 (2007).11. John M. Rounds Professor of Law, University of Kansas School of Law.12. George Lynn Cross Research Professor Emeritus, and former McAfee Chair in Law andCentennial Professor, University of Oklahoma College of Law; Of Counsel, Phillips, McFall,McCaffrey, McVay and Murrah, Oklahoma City, Oklahoma.13. Fred H. Miller, Writing Your Own Rules: Contracting Out Of (And Into) the UniformCommercial Code; Intrastate Choice of Law, 40 LOY. L.A. L. REV. 217 (2007).14. Id.[Vol. 40:1lINTRODUCTIONother local codified or substantively relevant non-codified legalprinciples or regimes.Raymond Nimmer 5 and Jean Braucher 6 both weigh in on theapplicability of Article 2 to software licensing in their essays: AnEssay on Article 2's Irrelevance to Licensing Agreements17 andContracting Out of Article 2 Using a "License" Label: A Strategythat Should Not Work for Software Products, respectively.' 8  DeanNimmer echoes and expounds on Professor Miller's expressedirrelevancy of Article 2 to licensing agreements arguing thatinformation is not a good, that the rationale of Article 2 default rulesis a property-based paradigm, and that the general themes of goodfaith, practical construction, and policing for unconscionable termsare an integral part of general contract law. Hence, these rules anddoctrines as Article 2 themes are irrelevant. Professor Braucher, aspart of the continuing debate, takes exception to the positionsespoused by Nimmer and Miller and offers a functional approach toresolving the issue of the applicability of the Article 2 to softwarelicensing.Professors James E. Byrne 9 and Sarah Howard Jenkins" andpractitioners Meredith S. Jackson and Paul S. Turner2 focus on thetheory and mechanics of contracting out of specific substantivearticles. Meredith S. Jackson's22 essay, Contracting Out of Article9,23 presents a pithy assessment of the likely motives driving thedesire to contract out of Revised Article 9, the planning paradigmsavailable-including "morphing" the collateral, and the attendant15. Dean, Leonard H. Childs Professor of Law, and Co-Director of the Intellectual Propertyand Information Law Program University of Houston Law Center.16. Roger C. Henderson Professor of Law, James E. Rogers College of Law, University ofArizona.17. 40 Loy. L.A. L. Rev. 235 (2007).18. 40 Loy. L.A. L. Rev. 261 (2007).19. Professor of Law, George Mason University School of Law; Director of the Institute ofInternational Banking Law & Practice, Inc.20. Charles C. Baum Distinguished Professor of Law, University of Arkansas at Little Rock,William H. Bowen School of Law.21. Former Attorney at Law; author of numerous articles and books, including Law ofPayment Systems and EFT and Negotiating Wire Transfer Agreements: A Guide for TreasuryExecutives, Bankers & Attorneys; and former Assistant General Counsel Occidental PetroleumCorporation, San Diego, California.22. Ms. Jackson heads the debt finance practice of Irell & Manella LLP's debt finance andhas been named California Super Lawyer from 2003 to the present.23. 40 LoY. L.A. L. REV. 281 (2007) (emphasis added).Fall 2006]LOYOLA OF LOS ANGELES LAW REVIEWrisks in completely contracting out of Revised Article 9 or merelyvarying its effect. She tersely concludes, however, that "[w]ithin theparameters of careful structuring and disclosure ... parties shouldfind Article 9 a flexible and responsive system of rules that facilitatescommercial creativity. 24  Impliedly she stresses, as other con-tributors, the need to be knowledgeable of not only the principles,policies, and goals of the applicable law but also those of the targetregime. Byrne, Jenkins, and Turner separately provide compre-hensive evaluations of the ability to contract out of or vary the termsof Article 5,25 Article 2,26 and Articles 3, 4, and 4A,27 respectively.Stephanie Heller, Counsel and Vice President of the FederalReserve Bank of New York, echoes the general concern of relevancyand persuasively challenges the notion of the continued viability ofArticle 4 payments law as bank collection process shifts from papercheck processing to electronic processing in her essay entitled: AnEndangered Species: The Increasing Irrelevancy of Article 4 of theUCC in an Electronics-Based Payments System.28 Heller provides aconcise review of automatic clearing house check conversionproducts and the growing use of inter-bank electronic checkexchange agreements for the collection of electronic check images,two separate and competing paradigms that are swiftly putting an endto the need for paper based rules. She concludes that agreements orconsent to the use of a check as the source of collection informationfor check conversion products, opting out of Article 4, are motivatedby a desire for faster payment and not necessarily a rejection ofArticle 4 rules. "Variation of the UCC rules is not the driver of thecontracting out practice but rather an unexpected casualty of it. '29 Inher discussion of agreements for the collection of electronic images,Heller identifies the most troublesome issues raised by the processand the void in existing payments laws, including Article 4 and24. Id. at 296 (2007).25. James E. Byrne, Contracting Out of Revised UCC Article 5 (Letters of Credit), 40 Loy.L.A. L. REV. 297 (2007).26. Sarah Howard Jenkins, Contracting Out of UCC Article 2, 40 LOY. L.A. L. REV. 401(2007).27. Paul S. Turner, Contracting Out of the UCC-Variation by Agreement under Articles 3,4, 4A, 40 LOY. L.A. L. REV. 443 (2007).28. 40 Loy. L.A. L. Rev. 513 (2007).29. Stephanie Heller, An Endangered Species: The Increasing Irrelevance of Article 4 of theUCC in an Electronics-Based Payments System, 40 LOY. L.A. L. REV. 513 (2007).[Vol. 40:1INTRODUCTIONCheck 21.Finally, Professor Christina L. Kunz30 addresses the rarelyconsidered ethical implications of efforts employed by lawyers tocontract out of applicable legal regimes, triggering among otherethical duties those of competency and zealous representation withinthe bounds of the law.3 These ethical questions, she suggests,"apply to all contractual drafting" including discerning mandatoryprovisions, drafting on the edge of validity, proposing invalidcontractual clauses, and making representations to clients, opposingcounsel, or opposing parties.We believe this symposium of articles and essays is only part ofthe dialogue on both the private ordering of contractual relations andthe relevancy of the UCC as global commerce and electronicpayments are increasing exponentially. We invite each reader notonly to engage the substance of our individual contributions but alsoto participate in the discourse by way of critique or response.30. Professor of Law, William Mitchell College of Law.31. Christina L. Kunz, The Ethics of "'Iffi' and Invalid Contract Clauses, 40 LOY. L.A. L.REV. 487 (2007).Fall 2006]

Contracting Out of the UCC

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Contracting Out of the UCC

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