In Defense of the Incorporation Strategy
Jody S. Kraus
University of Pennsylvania Law School
Steven D. Walt
University of Virginia School of Law
THE JURISPRUDENTIAL FOUNDATIONS OF CORPORATE AND COMMERCIAL LAW, (Kraus & Walt, Eds.), Cambridge University Press, 1999
Contract law must provide rules for interpreting the meaning of express terms and default rules for filling contractual gaps. Article 2 of the Uniform Commercial Code provides the same response to both demands: It incorporates the norms of commercial practice. This "incorporation strategy" has recently come under attack. Although the incorporation strategy for gap-filling seems to have survived criticism, the incorporation strategy for interpretation remains heavily criticized. Critics charge that the expected rate of interpretive error under an incorporationist interpretive regime is so excessive that almost any plain meaning regime would be preferable.
The attack on the incorporation strategy for interpretation is fundamentally flawed. The best interpretive regime is one that, all else equal, minimizes the sum of interpretive error costs and the costs of specifying contract terms. Critics of the incorporation strategy have focused exclusively on the former and completely ignored the latter. Yet the chief virtue of the incorporation strategy for interpretation is its promise to yield specification costs well below that of plain meaning regimes. Even if plain meaning regimes have lower interpretive error costs, the incorporation strategy is superior if its lower specification costs outweigh its higher interpretive error costs. Moreover, most critics treat their objections to Article 2 as objections to the incorporation strategy generally. But Article 2 is just one possible institutional variant of the incorporation strategy. All of the sources of interpretive error critics identify can be substantially reduced, if not avoided, by making feasible alterations to Article 2 that nonetheless preserve its incorporationist character.
This Article defends the incorporation strategy as a method of contractual interpretation. Part II analyzes the debate between incorporation and plain meaning regimes. After explaining the comparative and empirical nature of this debate, we present the intuitive case for believing that incorporationist interpretive regimes will yield significantly lower specification costs than plain meaning regimes. Part III considers recent objections to the incorporation strategy for interpretation. These objections identify several potential sources of interpretive error and offer both a priori and empirical arguments to suggest these errors are likely to be extensive in any incorporation regime. We argue that these criticisms overstate the probable extent of interpretive error under Article 2, and that all of the kinds of interpretive errors identified can be significantly reduced by feasible changes to Article 2. Part IV describes the salient features in Article 2 that implement the incorporation strategy and presents possible amendments to reduce the extent of the interpretive errors identified in Part III. Given the distinction between the incorporation strategy and its implementation, Article 2 can accommodate these amendments without abandoning the incorporation strategy. Part V concludes by summarizing the argument for favoring the incorporation strategy for interpreting contracts among a heterogeneous group of contractors: Compared to a plain meaning regime, the lower contract specification costs of a carefully designed incorporation regime will outweigh its higher interpretive errors costs.
Accepted Paper Series
Date posted: July 21, 1999
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