Commercial norms, commercial codes, and international commercial arbitration.

AuthorDrahozal, Christopher R.

ABSTRACT

This Article examines whether the incorporation of commercial norms into commercial codes is an appropriate law-making strategy. Most commercial codes, including the Uniform Commercial Code, regard common business practices as an important source for courts to consider when resolving contract disputes. Yet some scholars criticize this incorporation strategy, arguing that reliance on commercial norms is often inappropriate and may distort the true nature of the parties' agreement. Reliance on commercial norms does restrict the ability of contracting parties to allocate part of their agreement to extra-legal means of enforcement. Nevertheless, this Article asserts that those costs may be outweighed by the benefits of incorporating commercial norms into commercial codes.

The Article looks to international commercial arbitration as a source of evidence for evaluating the appropriate role of commercial norms in resolving contract disputes. This evidence is helpful to answering the question whether the costs of relying on commercial norms outweigh the benefits because international arbitration is consensual, resembles adjudication in public courts in important ways, and is a highly competitive business. The author finds that, generally, international commercial arbitration relies on commercial norms to resolve such contract disputes. Although the evidence presented is not conclusive, it does suggest that the benefits of reliance on trade usages (but not prior dealings between the parties) exceed the costs from any distortion of the parties' agreement.

  1. INTRODUCTION

    Modern commercial codes treat common business practices--as reflected in usages of the trade as a whole and in the prior dealings of the parties to the contract--as an important source to which courts can turn in resolving disputes about the parties' obligations under their agreement. Article 2 of the Uniform Commercial Code (UCC) provides that usages of trade, courses of dealing, and courses of performance "give particular meaning to and supplement or qualify terms of an agreement."(1) The rationale of the drafters of Article 2 was that such norms of commercial behavior are an important source of rules governing the parties' behavior and that a commercial code should incorporate those norms when available.(2) The Convention on Contracts for the International Sale of Goods (CISG) similarly provides that the "parties are bound by any usage to which they have agreed and by any practices which they have established between themselves," including any "usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned."(3)

    Whether incorporation of commercial norms into commercial codes is an appropriate law-making strategy has become the subject of much scholarly debate.(4) Criticizing the incorporation strategy is Professor Lisa Bernstein, who argues that commercial norms may reflect practices that seek to preserve the relationship of the parties ("relationship-preserving norms") rather than the norms the parties themselves would choose when their relationship essentially is at an end ("end-game norms").(5) The costs from such an inappropriate reliance on commercial norms, Bernstein argues, may outweigh the informational value of norms to generalist judges in understanding the parties' agreement. She finds evidence in support of her thesis in the treatment of trade usages and parties' dealings by arbitrators resolving disputes under the auspices of the National Grain and Feed Association (NGFA). NGFA arbitrators, Bernstein concludes, use a much more formalistic approach to resolving contract disputes than do judges applying modern commercial laws. This more formalistic approach gives clear precedence to the parties' contract terms and to the trade rules of the association over uncodified trade practices and dealings of the parties.(6) Bernstein acknowledges, however, that there may be "certain aspects of grain and feed transactions and the institutional environment created by NGFA that make a formalistic adjudicative approach particularly well-suited" to that setting.(7)

    This article offers an empirical rejoinder to Professor Bernstein's criticism. It looks to international commercial arbitration, rather than trade association arbitration, as a source of evidence for evaluating the appropriate role of commercial norms in resolving contract disputes. International commercial arbitration provides a useful setting for such an examination for several reasons. First, international commercial arbitration is consensual. The parties initially must agree to arbitrate at all; they must also agree on any institutional rules to apply, the method by which arbitrators are chosen, and the situs of the arbitration. When parties agree to arbitrate using certain rules, with particular arbitrators, and at particular sites, presumably it is because such dispute resolution makes them better off than they would be using alternative arrangements. Second, international commercial arbitration is a highly competitive business. Arbitral institutions, such as the International Chamber of Commerce (ICC), compete with each other for the administrative fees paid by parties who arbitrate under their auspices. Countries compete to be the arbitral situs chosen by the parties and reap the economic benefits that result from such a choice. Arbitrators compete to be selected by the parties to resolve their disputes. This competition is facilitated by international lawyers who select those rules, laws, and arbitrators that ex ante benefit their clients. Third, international commercial arbitration is more like court adjudication than is the NGFA arbitration studied by Professor Bernstein. For example, the decisionmakers in international arbitration hearings are likely to be more like the generalist judges in national courts than are the specialist arbitrators in trade association arbitrations. The informational value of trade usages and parties' dealings will likely be higher to these generalists, who, while experienced in deciding international disputes, may not be experts in the particular industry involved.

    Examining international arbitration rules and awards reveals an approach to trade usage more like the approach taken by the drafters of the UCC and the CISG than the formalistic approach of the NGFA arbitrators. The Arbitration Rules of the ICC, for example, provide that "[i]n all cases the Arbitral Tribunal shall take account of the provisions of the contract and the relevant trade usages."(8) The rules of many leading international arbitral institutions are similar.(9) The institutional rules do not, however, direct the arbitrators to consider in a like manner the parties' prior dealings. Similarly, international arbitration statutes, which are a product of interjurisdictional competition for arbitration business, increasingly require arbitrators to consider trade usages, although not course of dealing or course of performance, when resolving disputes. Finally, arbitration awards rely on trade usages and considerations of good faith. Indeed, the awards rely on good faith to such an extent that a number of commentators have identified a duty of good faith in contract performance as a central principle of international contract law reflected in international arbitration awards.(10) The evidence again is far less strong for prior dealings between the parties.

    In sum, the general approach taken in international commercial arbitration is to rely on commercial norms--at least as reflected in trade usages--to resolve contract disputes. This evidence, while far from conclusive, suggests that when contract disputes are resolved by generalist judges (or arbitrators), the informational benefits of relying on trade usages (although apparently not prior dealings between the parties) exceed the costs identified by Bernstein. Thus, the evidence presented here supports the incorporation strategy followed by the UCC and the CISG as to trade usages, but the evidence does not support the incorporation strategy as to prior dealings between the parties.

  2. COMMERCIAL NORMS AND CONTRACT DISPUTES

    1. Incorporating Commercial Norms into Commercial Law

      Modern commercial codes require judges to rely on norms of commercial behavior in at least two ways in resolving contract disputes. First, codes expressly provide that the parties' agreement includes relevant usages of trade, courses of dealing, and courses of performance.(11) Under such code provisions, judges look directly to what is customary in the trade or between the parties in adjudicating any dispute.(12) Second, codes impose general requirements of good faith, reasonableness, and the like.(13) To determine whether a party has acted in good faith or reasonably, commercial codes direct judges to look at commercial norms as a baseline.(14) Drafters of commercial codes explain their reliance on commercial norms as an attempt to bring commercial law more in line with commercial practice. As explained by the drafters of the UCC, "the practices of businessmen and business houses are important factors in construing their contracts and actions and in determining their rights and liabilities.... [M]any of the changes effected by the Code are designed to adapt rules of law to the way that business is actually carried on."(15)

      The following two sections briefly describe how the UCC and the CISG incorporate commercial norms into commercial law.(16)

      1. Article 2 of the Uniform Commercial Code

        Article 2 of the UCC has been adopted by all of the fifty states except Louisiana. It applies to "transactions in goods."(17) The UCC distinguishes between usage of trade, course of dealing, and course of performance, all of which can reflect commercial norms. A "usage of trade" is "any practice or method of dealing...

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