This is a
continuation of a series of articles on the revised articles of the
Uniform Commercial Code.
The original Article
7 of the Uniform Commercial Code, “Warehouse Receipts,
Bills of Lading and Other Documents of Title,” included two earlier
uniform acts, the Uniform Warehouse Receipts Act (1906) and the Uniform
Bills of Lading Act (1909), with some provisions from the Uniform Sales
Act, which later became Article 2 of the UCC. Before 2003 Article 7
had not been revised since the original Uniform Commercial Code, a period
of 52 years. The longevity of the principles of warehouse receipts
and bills of lading illustrates the successful law and law-making as it
pertains to the commercial storage and shipment of goods. The basic
principles do not change in the 2003 revision. But there were
reasons to readdress this area of the commercial law in 2003, which will
be discussed later. First, let's discuss some of the basics of
The storage and shipment of tangible goods for
commercial purposes has been going on for centuries. The physical
side of the business is carried on by entities that provide warehouses
(warehousemen) and entities that transport goods from place of origin to
destination (common carriers). Article 7 provides for the transfer
of rights in the goods while they are stored and/or shipped. The
common law provided the rules of bailment and the terminology of bailor
and bailee is still incorporated in the Uniform Act. As the law
developed, the transfer of rights came to depend upon the transfer of
specific documents of title. The transfer of the documents from one
person to another became known as the transfer of the rights. Title
documents were known as warehouseman’s receipts on the storage/warehouse
side, and known as the bill of lading on the carrier side. The
original Article 7 and the 2003 revision all incorporate these basics.
One of the important elements carried forward into
the 2003 revision is that of negotiability. Free transfer of
interests is an important policy norm throughout the UCC. In Article
7, documents of title may be negotiable. Whether a document is
negotiable or non-negotiable depends upon how it identifies the transferee
and the way transfer occurs. A negotiable document may be one of two
kinds of paper documents, bearer paper or order paper. A document
made out to the bearer may be transferred from one person to another by
simple delivery of possession. The delivery transfers the rights to
the goods aka the title to the transferee. Order paper is made out
to a specific individual or person. After initial delivery to the
person named on the document, it may be negotiated to another person by
the indorsement of the named person and delivery of possession to that
other person. The rights to the goods and title pass with the
negotiation to the transferee.
Documents of title can also be made non-negotiable.
This is primarily done by a statement on the face of the instrument.
Non-negotiable documents of title may also be assigned or transferred.
The difference between negotiable and non-negotiable documents is the
rights that they may transfer. A non-negotiable document of title
transfers only the actual interests of the transferor. A negotiable
document of title may transfer more than the actual interests of the
transferor. For example, it can transfer free of any claims against
the issuer of the document. A non-negotiable document is not free of
Negotiation as a concept exists to make commerce in
goods possible. Goods would not be transferred if the purchaser
always has to look behind the transaction to see who may come after the
goods after the transfer is complete. Negotiation removes this
peril. The principle detailed in Article 7 is consistent with
Article 3 of the UCC governing notes, drafts, and checks.
Article 7 governs other important aspects of the
transfer of rights in goods when stored or shipped, such as the liens of
warehousemen and carriers and the enforcement and allocation of risk of
loss of the goods either in storage or transit. However, the issue of
negotiation has been its single most important aspect, until the revisions
in 2003. That is when something very important occurred that changed
the way we looked at the principle of negotiation. That
"something" was computers, electronic communications and the
ability to create electronic documents of title.
Computers have been deranged and applauded for their impact on
commerce and business. Their impact on storage and shipment of goods
has been profound. Federal law has actually recognized electronic
documents for some time, but electronic documents of title cannot be
substituted one to one with tangible documents of title. Their
characteristics in electronic form are not the same as their
characteristics in tangible form.
The tangible form is a written document on paper with
signatures of issuers and subsequent transferors. The individual
document is a unique token of the rights and interests it represents.
Even when there is a copy, there is always the original. This is not
so with electronic documents. Originals and copies are
indistinguishable from each other in electronic form. Signatures in
the sense of an individual’s unique scrawl on a piece of paper cannot be
equally duplicated in an electronic document. Transferors and
transferees, who are remote from each other when tangible documents are
transferred, are not remote from each other in electronic media.
Electronic communications can occur between any two persons anywhere in
the world. Yet, it is difficult for each participant in an
electronic communication to verify or authenticate the identity of the
other party. To have the effective electronic documents that
commerce demands, new concepts had to be introduced into the law.
The concept of negotiation as we have known it in American law does not
apply in electronic media. Thus, the biggest addition to Revised
Article 7 was the new rules for electronic documents of title.
These rules dealt with distinct issues:
recognition of electronic documents of title; statute of fraud extensions;
establishment of the unique original in electronic form aka
authentication; and interchangeability between electronic and tangible
documents of title. In addition, the rules for electronic documents
of title had to work as seamlessly as possible into the existing system
governing tangible documents of title. The law had to avoid skewing
the choice between tangible and electronic documents of title in the favor
of either form. Only the actual marketplace could determine users’
choices. Revised Article 7 deals with these issues and meets the
test of seamless insertion into the existing law.
Recognition of electronic documents of title begins
in the definition of “Document of Title:” “An electronic document of
title is evidence by a record consisting of information stored in an
electronic medium.” Other definitions have been modified to agree
with this core definition. For example, “Holder” is defined to
include: “a person in control of a negotiable electronic document of
title.” Thus, electronic documents of title become the equal to
tangible documents of title.
Revised Article 7 also extends the statute of fraud
requirements to include electronic records and signatures. Any
writing requirement that relates to enforceability of a document is a
statute of frauds requirement. Article 7 treats electronic records
and signatures as the equivalent of paper documents and written, manual
signatures. This initially occurs in new definitions of “record”
and “sign.” A record is “information that is inscribed on a
tangible medium or that is stored in an electronic or other medium and is
retrievable in perceivable form.” The term “sign” is defined
to “execute or adopt a tangible symbol” and “to attach or logically
associate with the record an electronic sound, symbol or process.”
Within Revised Article 7, wherever the term “writing” or an equivalent
may have been used before revision, the term “record” is uniformly
used. When a document is required to be signed anywhere in Revised
Article 7, electronic signing meets the test.
Revised Article 7 also provides language stating
expressly that it modifies, limits and supersedes the federal Electronic
Signatures in Global and National Commerce Act. This express
language, permitted in the federal act, avoids any issue of federal
preemption. The federal statute allows specific tailoring for the
purposes of incorporating electronic records and signatures into state
It is not possible to transfer an electronic document
of title in the same manner as a tangible document of title, particularly
in terms of negotiating it. It cannot be guaranteed that a transfer
directly from one person to the next by delivery and/or signature will
transfer the authentic original document of title. An electronic
alternative to the tangible system was necessary. To accomplish the
equivalent system for electronic documents of title, Revised Article 7
adapts the concept of “control” to the purpose. It is not a new
concept. It originally was developed in Article 8 of the Uniform
Commercial Code for investment securities in the indirect holding system.
In the 1999 revisions to Article 9 the concept was adapted further for
secured transactions. The concept also can be found in Section 16 of
the Uniform Electronic Transactions Act for promissory notes. This
latter occurrence is most important for Revised Article 7, because the
issues of negotiation for promissory notes is very similar to those for
documents of title.
A person has control of a document of title for
Revised Article 7 purposes “if a system employed for evidencing the
transfer of interests in the electronic document reliably establishes that
person as the person to which the electronic document was issued or
transferred.” Such a system exists when it establishes a “single
authoritative copy ...which is unique, identifiable and ...
unalterable.” The authoritative copy must identify the person in
control or the next person to whom the document has transferred. The
person in control determines to whom the document is next transferred.
Further, the standard requires that copies that are not authoritative,
including copies of the authoritative copy, must be readily identifiable
as not being the authoritative copy.
There are many ways to meet this set of standards,
unlike negotiation of a paper document, which occurs in one way only.
One way to establish the single authoritative document is to have a single
custodian of the electronic record, who enters all transfers of the
document and identifies the person in control on its records. In such a
system, the person in control notifies the custodian of any transfer or
authorized change in the document, who then notates its records
appropriately and notifies the person in control and other relevant
parties of the action. A transfer would obviously shift control from
transferor to transferee. The transferee would become the new person
Encryption technology can provide other methods for
meeting these standards. Some kind of hybrid system of encryption
and custodian may arise. UCC Revised Article 7 does not indorse any
one system and more than one system may develop over time. It is not
possible to predict what technology will ultimately bring to electronic
transfer systems. Revised Article 7 allows the technology to develop
without need to amend it later when a new kind of technology comes along.
UCC Article 7 provides for an electronic system of
transfer for electronic documents of title and for the traditional paper
system of documents of title which includes negotiable documents of title.
Control is the operative term with electronic documents and negotiation is
the operative term for tangible documents of title. With respect to
the transfer of rights in a particular group of goods, can electronic
documents be converted to tangible documents and vice versa? UCC
Revised Article 7 provides for such conversions. An electronic
document may be converted when the person with control surrenders that
control to the issuer, who then issues a tangible document of title
containing a statement that it substitutes for the electronic document.
The same kind of process will convert a tangible document to an electronic
one. The person entitled to enforce a tangible document surrenders
possession to the issuer. The electronic document must also state
that it is a substitute for the tangible document. Without the ability to
convert from tangible to electronic documents, this system would not work.
The revisions to UCC Article 7, beyond making way for
electronic documents of title, primarily update or clarify existing rules
of law. There are references to tariffs and regulations in original
UCC Article 7 that no longer exist with deregulation and these have been
eliminated in the revised Article 7. There is nothing more
significant today as the rules for electronic documents of title.
These rules alone make it imperative for the states to enact the revision
to UCC Article 7 as soon as practicable but to date only 31 states have
enacted Revised Article 7 since it was given to the states in 2003.
Documents of title are fundamental to the transfer of goods in interstate
commerce. The Revised Article 7 of the UCC is commerce friendly and
not only does every state need to revise its' current Article 7, every
credit professional needs to understand them as well.
I wish you well.
The information provided above is for
educational purposes only and not provided as legal advice. Legal advice
should be obtained from a licensed attorney in good standing with the Bar
Association and preferably Board Certified in either Creditor Rights or