Custom in the Courts

INTRODUCTIONThe Uniform Commercial Code (Code) directs courts deciding disputes between merchants to look to usages of trade and other commercial standards and practices to interpret contracts and fill contractual gaps. This so-called incorporation approach1 was the brainchild of the Code's principal drafter, Karl Llewellyn, and was an important application of legal realist philosophy to commercial law.2 The incorporation approach was both endorsed and expanded in the most recent proposed revision of Articles 1 and 2 of the Code.3 It is also at the jurisprudential heart of many of the most important international commercial law statutes,4 including the recently completed Common European Sales Law.5The Code's incorporation strategy has been in operation in U.S. courts for over seventy years and has influenced the development of commercial law around the world; yet the justifications for the strategy have always been predominantly theoretical. The conceptual model underlying the strategy has never been tested or even evaluated against the reality of the way that its trade usage component operates in practice. This Article presents a detailed study of all of the sales-related trade usage cases digested under the Code's trade usage provision from 1970 to 2007. It then draws on the study's findings to reevaluate the core justification for the strategy, namely that as compared to a more formalist (agreement-centric) approach to interpretation, incorporation decreases specification costs without unduly increasing interpretive error costs.6Subject to the usual methodological limitations of studies based on reported cases, the study reveals that the trade usage component of the incorporation strategy works very differently in practice from the way that it has long been assumed to work in theory. The study demonstrates that interpretive error costs are likely to be higher than theorists assume since the types of "objective" evidence of trade usages that incorporation's defenders suggest will minimize the risk of interpretive errors7-such as expert witness testimony, trade codes, and statistical evidence-are not routinely introduced in sales-related litigation. Rather, in a majority of cases, the existence and content of usages was proven solely through the testimony or affidavits of the parties and/or their employees, a type of testimony that may be either deliberately or subconsciously self-serving.8 In addition, there was not a single case in which either party introduced any data that the alleged usage was regularly observed. The study also suggests, though by no means proves, that given the weak evidentiary basis of trade usage determinations, the Code's permissive parol evidence rule, and the ways that courts have interpreted the Code's hierarchy of authority, the incorporation strategy is unlikely to reduce-and may even increase- specification costs in many transactional contexts.In light of these and other findings about the incorporation strategy's effect on motions for summary judgment, transactors' ability to engage in litigation-related strategic behavior, and the interaction of the strategy and the operational policies and contract administration mechanisms used in large multi-agent firms, this Article concludes that significant commercial law reform is warranted. More specifically, it suggests that if commercial law is to effectively meet the needs of the modern outsourced and highly innovation-dependent economy, its background interpretive presumptions should be shifted in the more formalist/agreement-centric direction of the New York common law, at least in transactions between large business entities.Part I explores the statutory framework and commonly articulated evidentiary standards for incorporating trade usages into commercial agreements. It also discusses the ways that courts have interpreted and applied the Code's hierarchy of authority to permit usages to largely override express terms. …