Trade Usage in the Courts: The Flawed Conceptual and Evidentiary Basis of Article 2’s Incorporation Strategy
University of Chicago Law School
January 10, 2014
Northwestern University Law Review, Forthcoming
University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 669
U of Chicago, Public Law Working Paper No. 452
This paper draws on an empirical study of every trade usage case decided under the Uniform Commercial Code from 1970 to 2007 to revisit the debate over the desirability of the incorporation strategy, the interpretive approach that directs courts to look to course of dealing, course of performance and usage of trade to interpret contracts and fill contractual gaps. Although the strategy is generally defended on the grounds that it will reduce specification costs without unduly increasing interpretive error costs, the data presented in the paper show that the empirical assumptions on which this defense is based are empirically false. More specifically, it shows that contrary to the claims of incorporation's defenders, usages are not typically demonstrated through the introduction of “objective evidence” such as expert witness testimony, industry trade codes, or statistical evidence that a particular practice is widely observed. Rather, they are most commonly established solely through the testimony of the parties or their employees. Moreover, there is not a single case in the study in which the regularity with which a practice is observed is demonstrated through statistical evidence rather than mere assertion. Together with additional data demonstrating the frequency with which usages are permitted to trump written contractual provisions (thus requiring parties to fortify their contracts with multiple terms designed to fend off usage based interpretation), the study’s findings suggest that: (1) the strategy is likely to increase contract specification costs, and (2) the interpretive error costs introduced by incorporating usage are likely to be far higher than previously recognized. The paper then draws on this more accurate picture of the way the incorporation strategy really works in practice to explore the reasons that the conceptual basis of the arguments for incorporating trade usage are also deeply flawed, particularly when applied to contracts between large multiagent firms in the modern outsourced economy. The data and arguments the paper presents add to the growing literature in defense of neo-formalist approaches to contract interpretation, at least in contracts among businesses.
Number of Pages in PDF File: 53
Keywords: Commerical Law, Trade Usage, Norms, Contracts, Interpetation, Formalism
Date posted: December 13, 2013 ; Last revised: April 8, 2014
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