Merchant law in a merchant court: rethinking the Code's search for immanent business norms.

• Author: Bernstein, Lisa
• Position: Uniform Commercial Code - Symposium: Law, Economics, & Norms

INTRODUCTION I. MERCHANT LAW AND COMMERCIAL LAW

1. The NGFA System

   1. Usage of Trade

   2. Course of Performance and Course of

   Dealing

2. The Code's Adjudicative Approach

3. Conclusion II. THE THEORY OF LEGALLY UNENFORCEABLE

   AGREEMENTS III. TRADE USAGE, COURSE OF PERFORMANCE,

   AND COURSE OF DEALING

1. Usage of Trade

   1. Caveat

2. Course of Dealing and Course of Performance

   1. Flexibility

   2. Renegotiation

   3. Cooperation

   4. Caveat

   5. Other Distortions

3. Expansion of Commercial Practices IV. THE IMPORTANCE OF TRANSACTIONAL AND

   INSTITUTIONAL CONTEXT

1. Transactional Context

2. Institutional Context CONCLUSION

   INTRODUCTION

   This Article draws on a case study of merchant law in a merchant court to reexamine, and, ultimately, to challenge, the fundamental premise of the Uniform Commercial Code's adjudicative philosophy, the idea that courts should seek to discover "immanent business norms" and use them to decide cases.(1) This philosophy finds expression ia specific Code sections(2) and Official Comments,(3) judicial opinions,(4) academic commentary,(5) and the writings of the Code's principal drafter, Karl Llewellyn.(6) Most importantly, it is the basis of the Code's definition of agreement, which includes "the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance."(7) The Article 2 Editorial Board recently reaffirmed that "reducing the gap between law and practice . . . in the relevant business community"(8) remains a primary objective of the Code. It is currently considering amendments that would broaden the reach of the Code's course of dealing, course of performance, and usage of trade provisions.(9)

   This Article challenges the idea that courts should seek to discover and apply immanent business norms in deciding cases.(10) It demonstrates that while the drafters of the Code sought to incorporate these norms into the law in an effort to make commercial law more responsive to and reflective of commercial reality, they failed to recognize that this approach would fundamentally alter the very reality they sought to reflect, and would do so in ways that would have undesirable effects of commercial relationships and would undermine the Code's own stated goals of promoting flexibility in commercial transactions and "permit[ting] the continued expansion of commercial practices through custom, usage and agreement of the parties"(11)

   In the spirit of the Code and Karl Llewellyn, this Article-begins by looking at merchant practice. It presents a case study of the private legal system created by the National Grain and Feed Association ("NGFA.) to resolve contract disputes among its members. The study pays especially close attention to the willingness of NGFA's industry-expert adjudicators to take trade usage,(12) course of dealing, and course of performance into account in deciding cases. It finds that despite their industry expertise, NGFA arbitrators are reluctant to look to these indicia of immanent business norms. Unlike courts, which often permit course of dealing, course of performance, and usage of trade to trump express written terms, NGFA arbitrators take a formalistic approach to adjudication. They do not permit these considerations to vary either trade rules or written contractual provisions. This Article develops a theory to explain why sophisticated merchant-transactors might find NGFA's approach to adjudication preferable to the Code's approach, and then draws on it to analyze the effects of the Code's adjudicative approach on commercial relationships.

   Part I describes NGFA's private legal system and compares its tribunal's adjudicative philosophy to the adjudicative philosophy underlying the Code. Part II discusses the reasons that sophisticated transactors might allocate some aspects of their contracting relationship to the legal realm and some to the extralegal realm, or might include a provision in their written contract while acting or agreeing to act in another, perhaps contradictory, way. It suggests that recognizing the reasons that rational transactors may act or agree to act in ways that may contradict the terms of their contract undermines an important assumption underlying the Code's definition of agreement, namely that "the course of actual performance by the parties is ... the best indication of what they intended the[ir] writing to mean.(13) It then reconsiders the desirability of the Code's definition of agreement under the more realistic assumption that there is no necessary connection between transactors' actions and their intended meaning of the written provisions in their contract. It concludes that because the Code makes it difficult to enter into purely extralegal self-enforcing agreements, it prevents transactors from selecting the value-maximizing combination of legal and extralegal terms.

   Part III is the core of the analysis. It begins by suggesting that transactors do not necessarily want the relationship-preserving norms(14) they follow in performing contracts and cooperatively resolving disputes among themselves to be used by third-party neutrals to decide cases when they are in an end-game situation.(15) After presenting evidence that merchants implicitly recognize the distinction between relationship-preserving and end-game norms, it suggests that when courts apply the Code's usage of trade, course of dealing, and course of performance provisions, they will often be using relationship-preserving norms to resolve end-game disputes. It then explores the effects of this aspect of the Code's adjudicative approach on contracting relationships, and demonstrates that this approach birth prevents transactors from selecting their preferred mix of legal and extralegal terms and makes them less willing to flexibly adjust their contracting relationships. It also suggests that this approach may undermine transactors' attempts to create the contracting framework that will best promote successful renegotiation and longterm cooperation. Part III concludes by exploring the reasons that the Code's adjudicative approach may inhibit the "expansion of commercial practices."(16)

   Part IV returns to the case study and considers the reasons that NGFA's adjudicative approach is particularly well-suited to the private adjudication of grain and feed disputes. Finally, the Article concludes by offering some preliminary thoughts on the implications of the empirical observations and analysis presented in earlier sections for reform of the Code.

   1. MERCHANT LAW AND COMMERCIAL LAW

   The merchant-court system developed by the NGFA provides an unusual opportunity to empirically explore and reevaluate the Code's search for immanent business norms in a context where the concerns of litigation costs and institutional competence that have been the focus of the limited debate about the Code's adjudicative approach are conspicuously absent. This Part describes the operation of the NGFA system and compares the extent to which NGFA arbitrators applying the Association's trade rules and courts applying the Code are willing to look to usage of trade, course of dealing, and course of performance in deciding cases. It demonstrates that despite the industry-specific expertise and business acumen of NGFA arbitrators, in practice they give far less weight to these indicia of immanent business norms than do generalist courts applying the Code.

1. The NGFA System

   The NGFA is a trade association of firms and individuals who are active in the cash-markets for grain and feed. It began arbitrating disputes in 1896 and has been publishing written arbitration opinions since 1902. As a condition of membership in the Association, members must agree to submit all disputes with other members to the Association's arbitration system.(17) A member who refuses to submit to arbitration or fails to comply with an arbitration award rendered against him may, in addition to having his actions reported in the NGFA newsletter, be suspended or expelled from the Association.(18)

   The NGFA has adopted four sets of substantive trade rules that are designed to "reflect trade practice and facilitate trade between NGFA members."(19) The Grain Rules and the Feed Rules each cover the basics of contract formation, performance, repudiation, breach, damages, and excuse. The Barge Rules supplement these rules whenever "shipments are designated by contract to be transported by barge,"(20) and the Barge Freight Trading Rules "govern all disputes [involving] . . . the purchase and/or sale of barge transportation."(21) Unless they have been explicitly altered or excluded by a specific contractual provision, these rules govern all contracts between NGFA members. Together, they provide a comprehensive set of default rules governing the mast important aspects of cash-market transactions in grain or feed.

   The trade rules are supplemented by a highly detailed set of arbitration rules, whose applicability to disputes between NGFA members cannot be altered by contract. These rules set out the required filing fee,(22) the guidelines for the selection of arbitrators,(23) the types of information each party must provide to the tribunal,(24) the procedures for requesting an oral hearing,(25) the type of information the arbitrators should include in their written opinions,(26) and the procedures for filing and conducting an intra association appeal.(27) They include a one-year statute of limitations.(28) Under the trade rules, the time from filing to judgment is supposed to be less than six months.(29)

   The typical cash-market transaction in grain or feed that is governed by these rules is negotiated on the telephone, sometimes with the assistance of a broker, and is promptly confirmed through the exchange of written, largely standard-form, confirmatory memoranda.(30) The most common issues arbitrated are those that NGFA classifies as dealing with confirmations...