Judicial Incorporation of Trade Usages: A Functional Solution to the Opportunism Problem

Abstract

Article 2 of the UCC directed courts to look to business norms as a primary means of interpreting contracts. Recently the new formalists have attacked this strategy of norm incorporation as a misguided one that will lead inevitably to significant error costs. Accordingly, they have embraced plain meaning as the preferred interpretive strategy. This article argues that the strategy of rejecting trade usages unless they are part of the express contract is too rigid. The rejection is premised on an overly narrow cost/benefit analysis that fails to account for the functional role that such usages may play in curbing opportunistic behavior and thereby increasing gains from trade and overall welfare. Plain meaning and incorporation must each be evaluated to see how each one can achieve the parties' presumed instrumental goals of curbing opportunism - the hold-up game. Decision makers should also consider the particular reasons why parties failed to include the trade usages in their express contract. Some of the reasons for omission might argue for and some against norm incorporation. The incorporation decision should also depend on assessing the critical structural factors that make self-enforcement of trade practices possible. After proposing a taxonomy for assessing the normative issue of incorporation, the article examines the case law. It suggests that the divergences can be explained by whether invocation would achieve the parties' functional goal of reduced opportunism. The article concludes by suggesting that the taxonomy suggested here helps to overcome some past objections to incorporation strategy.

Keywords: Uniform Commercial Code, Article 2, Business Norms, Contracts, Plain Meaning, Opportunism, The hold-up Game

JEL Classification: K12, K20, K49