Comment: More in Defense of U.C.C. Methodology

• Author: Robert A. Hillman
• Position: Edwin H. Woodruff, Professor of Law, Cornell Law School

Edwin H. Woodruff, Professor of Law, Cornell Law School. Thanks to George Hay, Stewart Schwab, and Robert Summers for valuable suggestions. Annie Jeong and Rosanna Orfield provided excellent research assistance.

As James Bowers notes in his interesting and insightful contribution to this symposium,¹ the Uniform Commercial Code ("U.C.C." or "Code") methodology has recently come under attack on many fronts.² For example, Robert Scott, in a thoughtful and provocative series of articles, challenges the strategy of attempting to achieve substantive uniformity by codifying commercial law, particularly in the manner prescribed by Karl Llewellyn for Article 2 on sales.³ Another line of criticism questions whether certain contextual aids, such as trade custom, actually exist.⁴ A third source of complaints focuses on the negative incentives on the parties created by specific contextual sources of interpretation. For example, a prominent claim is that Article 2's reliance on the parties' course of performance makes the parties more rigid and inflexible in their dealings.⁵

Bowers focuses much of his defense of the U.C.C. on rebutting Scott's plain-meaning rule orientation. In Part I of this comment, I briefly summarize each writers' position and then add a few of thoughts of my own. In Part II, I respond to the claim that the Code's invocation of course of performance evidence creates perverse incentives.⁶

I Scott And Bowers

Although U.C.C. Article 2 is "formally uniform," having been adopted in at least substantial part in all fifty states,⁷ Scott asserts that, because of its methodology, the U.C.C. is "substantively" nonuniform, meaning that decisions applying it are inconsistent over time and in different jurisdictions.⁸ The problem, according to Scott, is that the U.C.C.'s "incorporation strategy" of directing courts to incorporate contextual evidence when they interpret and fill gaps in contracts produces inconsistent, non-uniform judicial decisions,⁹ and decreases the supply of reliable standardized gap-filling terms.¹⁰ In contrast, Scott claims that the common law's "plain meaning" rule, which resists "the implications of contextualization" and "invoke[s] the primacy" of express terms,¹¹ has been more successful in achieving "a fairly uniform menu of standardized terms . . . and a stable (i.e., uniform) interpretation of express terms."¹²

Scott relies on empirical, albeit derived from "casual observation,"¹³ proof of the superiority of the "plain meaning" approach in achieving uniform results. Scott asserts that reported cases show that "the risk of unpredictable interpretation has greatly increased for commercial parties under the Code."¹⁴ Although Scott acknowledges that the Code includes several admonitions to disregard extrinsic evidence that contradicts the written contract,¹⁵ he argues that "courts have frequently abandoned this principle on the grounds that there is almost always some contextual argument upon which seemingly inconsistent terms can be rationalized."¹⁶ Moreover, Scott maintains that parties who wish to protect their written contract terms from contextual attacks have a "considerable additional burden."¹⁷

According to Scott, not only is contract interpretation unpredictable, Article 2's contextual approach also "undermines the ability of courts to increase the supply" of standard, express gap- filling terms.¹⁸ This is because "[t]he abandonment by the Code of the plain-meaning rule has resulted in decisions that strip terms of their meanings and thus erode the reliability of standardized express terms."¹⁹ For example, suppose a court holds that evidence that a buyer has repeatedly paid for unloading and storage of goods overrides an express standardized term (F.A.S.) that allocates unloading and storage expenses to the seller. Scott asserts that such a decision undermines the reliability of the F.A.S. term and creates disincentives for parties to use the term in future contracts.²⁰

Scott mentions several reasons for judicial confusion in applying the U.C.C.'s "incorporation strategy." He doubts that courts are equipped to incorporate a commercial subgroup's practices and experiences in an efficient manner.²¹ In addition, courts fail because of "the fact-specific nature" of commercial disputes, which discourages generalization.²² Moreover, Scott believes that Article 2's solution to the fact-specificity hurdle, namely the invocation of the "supereminent norm of commercial reasonableness," also disappoints because, in applying it, courts do not "incorporate commercial norms," but instead "make deductive speculations" based on internal Code policy.²³

In contrast to the morass of Code interpretation and gap-filling, Scott asserts the relative certainty of common law results. Scott claims that "a strong majority of jurisdictions . . . rigorous[ly] adhere[] to the plain-meaning rule," and have been "unwilling to accept the implications of contextualization."²⁴ Under the plain meaning approach, according to Scott, parties have the incentive to choose "clear, standardized" terms.²⁵ As a result, the common law approach is more likely to generate "a menu of standard form invocations," written by the parties and approved by the courts.²⁶Next, Scott contends that under the common law "trade organizations and other private intermediaries," have supplied contract terms "that have been subject to remarkably uniform interpretation by state courts."²⁷ On the other hand, the code has been much slower in developing similar standardized options.²⁸ In short, Scott finds empirical proof that the common law has produced clearer and more certain understandings of contract terms and superior sources of filling gaps than has Article 2.

In response to Scott, Bowers argues, not that the Code's contextual orientation has been successful in achieving uniform interpretation of terms (except in the sense that courts uniformly incorporate sources outside of written contracts) or reliable standardized express provisions, but that the Code's methodology is nonetheless inevitable and desirable if Article 2's goal is to enforce as closely as possible the parties' intentions.²⁹ Bowers finds Scott's "plain meaning" orientation unpersuasive³⁰ and relies on legal realism's insights, including that legal decisions are a function of the "values taken on" by the facts of the case,³¹ that no two cases are factually alike,³² that words are meaningless out of context³³ or devoid of evidence of their purpose,³⁴ and that, by virtue of their nature as commitments projected onto an uncertain future, contracts inevitably are incomplete.³⁵ More than that, Bowers emphasizes the costs parties will incur in accommodating to dictionary definitions. Specifically, he argues that parties "are likely to be frequently trapped with inaccurate dictionary definitions of words which they efficiently use in all the rest of their dealings in a lexicographically deviant sense."³⁶

Because of Bowers' focus on legal realism, however, he mostly fails to challenge Scott's empirical comparisons of Article 2 and common law.³⁷ With respect to this set of issues, Scott recognizes that more work needs to be done: "It is clear that more analysis, both theoretical and empirical, is required before anyone can safely call for radical reform."³⁸ Scott therefore challenges defenders of the Code to further investigate his tentative conclusions.

Indeed, consider some of the issues of an empirical nature raised by Scott's analysis: Do decisions under the Code create a large burden on parties who seek to protect their written terms? Look at the wording of the Code. Under section 1-205(1), a course of dealing arises only when the "sequence of previous conduct . . . fairly . . . establishe[s] a common basis of understanding." Under section 1- 205(2), a usage of trade arises only when a practice "justif[ies] an expectation that it will be observed." Under Section 1-205 (4), express terms trump usage of trade and course of dealing evidence when the evidence is inconsistent with the express language. Under section 2-208(1), a course of performance requires "repeated occasions for performance." Under the same section, the party losing express contract rights must have "knowledge of the nature of the performance" and an opportunity to object. Moreover, "knowledge" is defined in section 1-201(25) to mean "actual knowledge," a subjective test. Finally, section 2-208(2) provides that express terms prevail over a conflicting course of dealing. Without a thorough analysis of a large group of cases, why should we believe that courts are systematically ignoring or misapplying these clear and direct commands?³⁹ Not only is the language clear enough to predict judicial compliance, I suggest in the second part of this comment that there is good reason to believe, at least with respect to incorporation of evidence from course of performance,⁴⁰ that courts generally follow the Code admonitions and allow such evidence to modify express terms only when the evidence strongly suggests the parties intended that result.⁴¹

Are court interpretations of contracts and gap filling under the Code generally unpredictable so that they "strip [contract] terms of their meaning?"⁴² This certainly did not appear to be the position of businesses participating in the Article 2 revision process that devoted lots of time and effort to defending (in business to business transactions) existing Article 2.⁴³ Businesses almost uniformly worried that proposed revisions undermined the relative certainty of transacting under existing Article 2. Moreover, I am unaware of any effort by business to overturn the Code's use of trade custom, course of dealing, and course of performance.

Are case decisions interpreting contracts under the common law more consistent and, for that matter, is the common law...