The Law Merchant in the Modern Age: Institutional Design and International Usages under the CISG

Commercial sales contracts typically are imperfectly drafted. They are incomplete over all possible states of the world that might materialize before performance and include terms that can be rendered ambiguous. In the event of dispute, some methodological approach must be employed to fill contractual gaps and resolve alleged uncertainties. In choosing among potential interpretive strategies, commentators who favor an economic perspective on contracts would select a strategy that maximizes the value of the contract, which includes minimizing the sum of all contracting costs. Those comprise specification costs, the costs related to drafting contract terms; administrative costs, the costs related to contract enforcement; and error costs, the costs related to erroneous interpretation of the parties' intended meaning.1 The primary competitors for the ideal strategy that considers these factors are the plain meaning rule and the incorporation strategy. The former is a highly formalistic strategy that considers common understandings of a contract term's meaning independent of its context. The latter incorporates context and commercial custom in filling gaps and defining terms. In American contract law, plain meaning is more consistent with common law practice, while incorporation is explicitly a part of the Uniform Commercial Code ("UCC"). The debate about the propriety of each strategy entails not only a contest about which of these sources of law has a theoretical advantage but also empirical claims about the actual practices of commercial actors.2 From the perspective of minimizing contracting costs, the ongoing debate is understandable. Different strategies would reduce different costs. Specification costs would be high under a plain meaning regime, because the use of terms with idiosyncratic meanings, understood within a trade but not by outsiders, would give rise to judicial interpretations not intended by the parties. Reliance on customs allows commercial actors to conclude deals on handshakes or minimal writings without incurring the risk that they will be disabled from introducing evidence of their intentions in the event of transactional breakdown. Administrative and error costs, on the other hand, favor plain meaning. The contextual significance of trade usage requires adjudicators to discover the alleged usage, define its scope, and determine its application to the issue at hand-all in all, a costly and error-prone process.3 The more we think that commercial actors rely on trade usages to define their legal obligations, the more the costs associated with the incorporation strategy are worth incurring. The more we believe that customs are inherently ambiguous or illusory, the more sensible the plain meaning strategy appears. The plain meaning/incorporation debate reflects the variability of these calculations. Lisa Bernstein, for instance, claims that legal recognition of custom in the UCC miscomprehends the limited scope of discernible usages and the limited role that commercial actors make of them outside of localized networks.4 For the most part, she suggests, commercial actors intend their adherence to customs to betoken cooperation, but prefer their legal relations to be governed by strict interpretation of contract language. Advocates of the UCC's incorporation strategy, on the other hand, suggest that custom has broad purchase in commercial environments and that Bernstein has, at most, demonstrated that there are conditions under which incorporation is an inferior strategy.5 All participants seem to agree that this debate cannot be resolved on an allor-nothing basis. Plain meaning will sometimes minimize total contracting costs, as will the incorporation strategy some of the time. It is less clear whether the cases in which one strategy dominates are so pervasive as to warrant its applicability to all cases, lest the costs of discovering exceptions prove too great. What is missing from the debate, however, is a taxonomy of the conditions under which trade usages would be sufficiently precise, observable, and verifiable as to warrant their incorporation. …