The Rise and Fall of Article 2

• Author: Robert E. Scott
• Position: Lewis F. Powell Professor and Matheson & Morgenthau Distinguished Professor

Lewis F. Powell Professor and Matheson & Morgenthau Distinguished Professor, University of Virginia School of Law. I am grateful to Ian Ayres, Marvin Chirelstein, Victor Goldberg, Ed Iacobucci, Avery Katz, Saul Levmore, Lance Liebman, Alan Schwartz, Elizabeth Scott, Bill Stuntz and George Triantis for helpful comments on earlier drafts. I also thank the participants at the faculty workshops at Columbia, Virginia and Yale Law Schools and the LSU Symposium on Unifying Commercial Law in the 20th Century, March 7-8, 2002.

Introduction

In August 13, 2001 the National Conference of Commissioners on Uniform State Laws voted eighty-nine to fifty-three to reject the Amendments to Article 2 of the Uniform Commercial Code that had just been approved in May by the American Law Institute.¹ The vote followed a last minute effort by the Article 2 drafting committee to amend the scope provisions of Article 2 in response to continuing criticism from representatives of the software and information industries. Several months later, at the request of the NCCUSL leadership, amended Article 2 with its revised scope provision was withdrawn from the agenda of the ALI Council in order to avoid its certain defeat. In the months that followed, the Article 2 drafting committee approved a new version that did not amend the basic scope section of Article 2 but did amend the definition of "goods" to exclude "information."² The Amendments, as revised, were then approved by NCCUSL at its annual meeting in August 2002. The Article 2 Amendments thus return yet again to the ALI Council and, in the event of its approval, to the ALI membership in May 2003.³

This most recent series of events follows a concerted effort by the ALI and NCCUSL over the past several years to remove controversial proposals from the Article 2 revision process so as to ensure approval by both bodies and ultimate adoption by the states.⁴ In the process of downsizing the "revisions" to "amendments," the reporter and associate reporter of the original Article 2 drafting committee, who had worked on the project for over a decade, resigned in protest.⁵ The effort to sanitize the Article 2 revisions developed because industry and consumer interests squared off against one another to produce deadlock on key substantive recommendations. Thus, even if the ALI and NCCUSL are eventually able to overcome their current differences, this deadlock over substantive issues represents the likely end of the fifteen year effort to revise substantially the law of sales as embodied in Article 2. As a consequence, the statute that Karl Llewellyn called the "heart and soul" of the Uniform Commercial Code⁶ will inevitably become less relevant to the legal regulation of commercial sales transactions.

The outcome of the Article 2 revision process was predictable. Indeed, it was predicted.⁷ More than six years ago, Alan Schwartz and I developed a model for analyzing the nature of the law reform proposals that are generated by private legislatures such as the ALI and NCCUSL.⁸ Our analysis led to three predictions, two of which are relevant to explaining the rise and the fall of Article 2.⁹ The first prediction is consistent with the well documented history of the drafting and adoption of the original Article 2.¹⁰ We predicted that, in the absence of influence from outside interest groups, these private legislative bodies will tend to promulgate many vague rules that delegate substantial discretion to courts. Such rules result not solely because of their intrinsic merits but because law reform projects of this sort are dominated by academic reformers with preferences that are typically far different from those of the median member of the legislative body. The reformers propose vague rules when they are unable to get clear, bright-line rules adopted. The original Article 2 project was, in fact, dominated by Karl Llewellyn and a cohort of fellow reformers, and their political preferences were far from those of the ALI and NCCUSL members who were considering the U.C.C. during the 1940s and 1950s.¹¹ Moreover, the original Article 2 is famous for its many open-ended, undefined terms. The use of generalized guides to decision such as custom and usage as well as vague, open-ended terms (such as reasonableness, good faith, and unconscionability) necessarily requires subsequent adjudication to give content to the parties obligations in particular cases. Committee: A Panel Discussion, 26 Bus. Law. 307 (1970).

The current Article 2 revision process, on the other hand, tends to confirm the second prediction. Unlike the reformer-dominated processes that characterized the initial drafting and enactment of Article 2, the recent revision process saw the emergence of cohesive and competing interest groups. When interest groups compete, we predicted that the strong institutional bias of these private legislatures to behave conservatively will be reinforced.¹² Cohesive interest groups are able successfully to block the proposals of the groups they oppose but are unable to get their own proposals enacted. The noise resulting from their competition leads the private legislature to reject any significant reform in favor of the status quo. Indeed, as the efforts to strip Article 2 of controversy over the past three years have shown, a strong enough status quo bias can induce rejection of even apparently innocuous proposals.

But, as is often the case, explaining one puzzle only serves to uncover another. What explains why the initial drafting process of Article 2 appears to track the first prediction (a reformer-dominated process that produced many vague and open-ended rules), while the Article 2 revision process is consistent with the second prediction (a process dominated by competing interest groups that retains the status quo)? A key to unlocking this puzzle is another peculiar artifact of the current contretemps over Article 2. Practically no one who might be thought affected by the process has seemed to care about the demise of the revisions except the interest group participants themselves and the hardy band of academic reformers who were promoting them.¹³ The collapse of efforts to revise "the heart and soul of the Code" has been greeted with silence throughout the commercial community.

I suggest that nobody but the participants has seemed to care for the simple reason that, to the rest of the commercial world, Article 2 has become largely irrelevant. What has happened? There is evidence that large numbers of commercial parties have opted out of the sales provisions of the Code. Private arbitration is used to enforce trade association rules and standard form terms that replace the default rules of Article 2. The opting out by commercial interests, extending over many years, would mean that the principal remaining function of Article 2 is to regulate mass-market sales transactions. Many of those transactions implicate the licensing of computer information as well.¹⁴ The interest group competition thus arises in the clash between the representatives of retail sellers (and licensors) and consumer buyers (and licensees) over the appropriate scope of market regulation of standard form contracting.¹⁵

In this Essay, I examine the political economy of the Article 2 project from its origins to the present. Part I begins with the two normative questions that have preoccupied contract theorists for more than a century: What is the proper domain of freedom of contract? And, within that domain, how should the law complete the gaps in incomplete contracts? I focus on Llewellyn's unique conception that these apparently separate questions are, in fact, aspects of a single institutional objective, an objective that became the normative foundation for Article 2. In Part II, I analyze the drafting and enactment process of the original Article 2 and evaluate the success of the new sales law it introduced, a success attributable in no small measure to the replacement of archaic vestiges of property law with efficient contract default rules. In Part III, I consider the effects of the compromises Llewellyn made to secure the enactment of the Code. Of particular significance is how the vague terms that invoke the commercial context (originally intended by Llewellyn as a means of incorporating ex ante default rules) have been used to challenge the objective meaning of disputed contracts. For many commercial parties, exit may have been a cheaper option than lobbying for clearer and more predictable default rules. But the parties to mass-market sales transactions remain subject to Article 2, and their representatives have sought to influence the revision process. Thus, the focus has shifted from Llewellyn's original goal of prescribing optimal default rules for commercial...