Beware of the Rules of Explicitness in Commercial Transactions

It’s a virtue to mean what you say, but in commercial transactions it’s even more virtuous to say what you mean — and that means being explicit. The rules of explicitness are a collection of rules (some statutory, others judicial) that require a heightened degree of explicitness for a particular term to be effective in a written agreement or commercial transaction.

Because some rules of explicitness only apply in one state and others apply in common or federal law,  transacting parties that draft their own written agreements and documents are at risk of breaking them.

The ends result? Like secret liens, the rules of explicitness can surprise well-intentioned parties and render clauses and indeed entire agreements ineffective.

Examples of Rules of Explicitness

Disclaiming the Warranty of Merchantability

Section 2-316 of the U.C.C. requires that a seller, in a contract for the sale of goods, must mention “merchantability” or use language similar to “with all faults” and “as is” to make explicitly clear that there is no warranty on the goods.

Describing Collateral in a Security Agreement

U.C.C. § 9-108(c) provides that a description such as “all the debtor’s assets” or “all the debtor’s personal property” is ineffective. Therefore, an additional 17 words are sometimes necessary: all accounts, chattel paper, deposit accounts, documents, goods, general intangibles, instruments, investment property, letter-of-credit rights, letters of credit, and money.

Describing Commercial Tort

According to U.C.C. § 9-108(e)(1), describing collateral by its statutorily defined type is ineffective for a commercial tort claim. Therefore, saying that the collateral includes “all commercial tort claims” will in fact cover none.

Providing for Attorney’s Fees

As of this writing, in at least one state, the clause  “in any action relating to this Agreement, the prevailing party will be entitled to reasonable attorney’s fees” does not cover fees incurred in a successful appeal. To have such fees included, the clause must explicitly refer to fees incurred in appellate proceedings.

Providing for Interest

At least two explicitness rules deal with the right to interest on indebtedness. In agreements between creditors and debtors, the phrase “until full payment is made” may equal “until judgment is rendered” without sufficient explicitness.

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The materials on this website are for informational purposes only and not for the purpose of providing legal advice.