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Reproduced with permission from 24 Virginia Journal of International Law (1984) 619-665

Trade Usages in International Sales of Goods: An Analysis of the 1964 and 1980 Sales Conventions

Stephen Bainbridge

Introduction

I. Trade Usages in International Commercial Law

A. The law merchant
B. The absorption of the "law merchant system by the common law
C. The new national laws of international commerce
D. ULIS and trade usage
     1. Development of ULIS
     2. Objections to ULIS
     3. Trade usage provisions
E. CISG and trade usage
     1. Development of CISG
     2. The politics of usage
          i. The U.S. perspective on trade usage
          ii. The Socialist perspective on trade usage
     3. Development of Article 9
          i. The Draft Convention
          ii. The Vienna Conference and the final version of Article 9

II. Trade Usage Under the Convention: A Legal and Economic Comparison

A. Assumptions underlying an economic analysis of trade usage
     1. Assumptions about the nature of commercial parties
     2. Assumptions about the role of legal rules
     3. Assumptions about the nature and role of trade usage
B. Binding usage
     1. Implied incorporation of usage
     2. The reasonable person
     3. Custom and customary law
     4. The distinction between domestic and international usage
C. Other issues
     1. Usages as interpretive devices
     2. Resolution of law-usage conflicts
     3. Careful negation
D. Summary

III. Conclusion

Introduction

One of the most significant recent developments in transnational interaction is the ever-expanding volume of international sales.[1] This growing volume of sales has exacerbated problems which result from the diverse nature of national commercial codes.[2] Although national laws governing international trade appear to share many basic principles,[3] considerable differences in their substance [page 619] and their application create difficulties in negotiating and resolving international sales contract disputes.[4] These difficulties create obstacles to the further growth of international trade.[5] Indeed, the recurrent obstacles to international trade presented by the diverse nature of national commercial codes have led many to call for the unification of international trade law through a universal international commercial code.

Recently, there have been two major attempts to create a uniform system of international contract law. The first of these attempts was the promulgation of the Uniform Law on the International Sale of Goods [ULIS] [6] in 1964 by the International Institute for the Unification of Private Law and the Hague Conference on Private International Law.[7] A variety of defects prevented widespread adoption of ULIS.[8] The United States, like many other nations, did not seriously consider ratification of either the ULIS or its companion Uniform Law on the Formation of Contracts [ULF] [page 620] Conventions.[9]

The failure of ULIS as a legal regime, however, led the United Nations Commission on International Trade Law [UNCITRAL] to attempt to draft a second international sales convention in 1966. The UNCITRAL effort culminated in March, 1980 with a diplomatic conference of sixty-two nations in Vienna.[10] On April 11, the Vienna Conference concluded its meeting by unanimously adopting the United Nations Convention on Contracts for the International Sale of Goods [CISG].[11] By September 30, 1981, when the signatory period ended, twenty nations had signed the Convention.[12]

The CISG Convention appears destined for widespread acceptance. As of December 12, 1983, six states had ratified it and five other states, including the United States, were considering ratification.[13] The American Bar Association [14] and numerous commentators [page 621][15] have recommended ratification by the United States. President Ronald Reagan transmitted the Convention to the United States Senate for ratification on September 21, 1983.[16] Senate hearings are expected during the spring of 1984, with probable ratification of the Convention by the end of the year.[17]

The likelihood that the Convention will enter into force in the near future means that commercial lawyers must familiarize themselves with CISG,[18] and begin developing methods of analyzing and applying its provisions. This Note will apply principles of economic analysis, developed in the context of United States commercial law,[19] to the trade usage [20] provisions of the 1964 ULIS and the [page 622] [1980] CISG Conventions. The trade usage provisions were selected as an example because of the flexibility that they give the Convention to adapt to new commercial problems. As such, the provisions are amongst the most important features of the CISG Convention.[21] Full understanding of the CISG also requires an analysis of why the 1964 ULIS Convention failed, ULIS's influence on CISG, the political factors which affected the drafting of the CISG text, and the economic effects on trade of its adoption. Therefore, Part I of this Note traces the development of the ULIS and the CISG Conventions in their historical and political contexts, with emphasis on the trade usage articles. Part II presents a legal and economic comparison of the ULIS and CISG trade usage articles,[22] emphasizing binding usages under the Conventions, usages as interpretative devices, law-usage conflict resolution, and the absence of a requirement of "careful negation." This comparison suggests ways in which the 1980 Convention improves upon its predecessor; and the Note argues that the improved trade usage provisions warrant ratification. Part II concludes with a brief summary of the CISG trade usage regime.

I. Trade Usages in International Commercial Law

Modern commercial transactions are incredibly complex. There are many more facets to a transaction than a businessman or lawyer is likely to consider. Agreements are concluded hurriedly by cable or telephone. Efficiency and profit depend on speed and volume, so commercial parties cannot tolerate a laborious approach to transacting. The need for speed means that the parties are likely to bargain as little as possible and are unlikely to address in detail every possible problem related to the contract.[23] Where the legal system provides rules on which to base expectations about the contract, however, the parties do not need to include a clause to address every conceivable contingency nor do the parties need to define [page 623] every term they use.[24] Trade usage is an important example of these legal rules that fill in the gaps and that interpret the terminology in the parties' agreement.

Given the complexity of commercial negotiations, merchants probably will continue to fail to tie their contracts explicitly to applicable trade usage. This casual approach is justified when no dispute arises. The problem faced by the commercial law, however, is how to resolve the disputes that do arise when the transaction does break down.[25] This section will explore some of the answers to this problem that international trade law has provided.

A. The Law Merchant

Modern international commercial law has gone through three periods of development: the medieval "law merchant" system (lex mercatoria or mercantile law), the absorption into domestic legal systems, and the recent codification efforts.[26]

The medieval origins of the "law merchant" [27] system can be traced to the maritime cities of twelfth-century Italy.[28] The true [page 624] "law merchant" system began as an outgrowth of the markets and fairs of medieval England, France, and Germany.[29] By 1622, the system was defined sufficiently enough for Gerard Malynes, a merchant, to characterize it as "a comprehensive body of authority which had been created not by kings or judges but by the custom of merchants, which was international rather than national in character, and which was distinct from the common law of England."[30] Similar to the Uniform Commercial Code several centuries later, [the] "law merchant" system conformed to the usage and custom of the merchant class.[31]

Because the "law merchant" system was based on custom it was able to "escape from the rules and rigidity of feudal land law, and also from judges and juries who knew little of the life of commerce."[32] Disputes between merchants were settled by an international customary mercantile law that mercantile courts enforced. The royal charter for trade fairs granted the right to set up a "piepowder court,"[33] which was composed of a merchant jury. The "piepowder court" used summary procedures to settle disputes between merchants quickly and fairly.[34]

Scholars have compared the "law merchant" system and the "piepowder courts" to modern arbitration procedures. As some scholars have stated, "in some situations the merchant's 'law' may have been little more than a decision out of hand by merchants who understood the transaction and the expectations of the parties."[page 625][35] In short, the medieval period was a time of relatively uniform law. The "law merchant" system sought to facilitate commerce by protecting the expectations of the parties through the liberal use of custom and practice, this use of custom and practice led to many of the practices of modern merchants and the rules of commercial law.

B. The Absorption of the "Law Merchant" System by the Common Law

After the fourteenth century, the "pie powder" courts entered a decline in England. The decline culminated in 1477 with legislative limitation of the "piepowder court's" jurisdiction,[36] and the incorporation of the "law merchant" system into the common law. In Woodward v. Rowe,[37] for example, the King's Bench held that the law of merchants was part of the law of the land.[38] Unfortunately, the "law merchant" system lost much of its flexibility and its ability to adapt to changes in commerce when the common law absorbed it.[39] Customs, previously proven before a jury of merchants familiar with the customs and expectations of the disputants, now had to be "proved in each case 'to the satisfaction of twelve reasonable and ignorant jurors.' " In addition, judges were often hostile to, or ignorant of, the customs of merchants.[40] This ignorance and hostility of the common law courts towards merchant custom led many merchants to settle disputes between themselves.[41]

Lord Mansfield's tenure as Chief Justice of the King's Bench [42] marked a period of further consolidation of merchant custom and common law.[43] Mansfield used special juries of merchants "who both knew and received testimony concerning commercial usage."[44][page 626] By requiring the jury to answer specific questions of custom, Mansfield preserved generally-accepted customs within the common law system.[45]

Although the approach of Mansfield and his successors initially added a cosmopolitan dimension to the English common law of commerce,[46] by the nineteenth century the process of absorption into the law of England caused English commercial law to lose much of its international flavor.[47] The absorption of commercial law into municipal legal systems occurred in most continental countries at the same time.[48] The process of absorption had other drawbacks in addition to a loss of internationality. Chief among these was an increasing inflexibility.[49][page 627]

C. The New National Laws of International Commerce

There were, however, powerful reasons for the further absorption of commercial law into the national legal systems. Among these were the rise of nationalism and the resulting drive for strong national courts, a need for the law to be more clearly defined than under the "law merchant" system, and a growing desire for more official and formal law-making.[50]

Beginning in the nineteenth century the drive for a more formalized commercial law led towards national codification movements. Codification began in France with Colbert's Ordounance sur la Marine in 1681 and culminated with Napoleon's Code de Commerce in 1807.[51] In common-law states, codification did not occur until nearly the end of the nineteenth century. British codification began in 1882 with the Bills of Exchange Act and continued in 1893 with the Sale of Goods Act.[52] Unlike the continental codes, the British acts did not attempt to nationalize and reform the commercial law; rather, the British attempted to restate the existing common law as exactly as possible.[53] A similar process occurred in Germany and the United States.[54][page 628]

The British and United States codes were not well adapted to the problems of international trade.[55] Several of the provisions of both codes were contrary to the usual expectations and understandings of international commerce.[56] The Uniform Commercial Code grew partly out of an attempt by the Merchants Association of New York to change the United States Uniform Sales Act so the Sales Act would handle the problems of international trade more effectively.[57] The U.C.C. outgrew this rather modest beginning but it retained many features of "internationalism."[58]

D. ULIS and Trade Usage

Despite the growing dominance of national and regional commercial codes during the nineteenth and twentieth centuries, the "law merchant" system, based on custom and actual commercial practice, survived and developed as a weak form of international law.[59] The courts of a number of nations remained hostile, however, to international trade law based on commercial practice.[60] Many international merchants increasingly preferred arbitration to the judicial resolution of disputes since international arbitrators were more receptive to international commercial practice.[61] Judicial hostility to international custom and a dramatic increase in international trade helped fuel calls for the creation of a new uniform [page 629] law of international sales similar to the "law merchant" system.[62] Thus, a desire for stable and predictable trade made a uniform law of international sales crucial.[63] ULIS was an attempt to meet these needs.[64]

1. Development of ULIS

Development of ULIS began in 1930 when the International Institute for the Unification of Private International Law [the Rome Institute] brought together a committee of European legal scholars to draft a uniform law of international sales.[65] An initial draft was prepared and submitted to various governments in 1935, with revisions in 1939, 1951, and 1963.[66] A conference to consider the 1963 draft was scheduled for April, 1964.[67]

The United States did not participate in the preparation of the early drafts, as it was not a member of the original Rome Institute.[68] In late 1963, however, the United States became a member of the Rome Institute [69] and accepted an invitation to participate in the 1964 Conference.[70]

In three hectic weeks, the Conference approved the ULIS and the ULF Conventions and opened them both for signature.[71] Both conventions entered into force in 1972 upon receiving the required ratification of five states.[72] However, a variety of flaws prevented either Convention from achieving wide acceptance. Indeed, by 1979, fifteen years later, only eight states had ratified the ULIS.[73][page 630]

2. Objections to ULIS

Objections of the United States delegation to ULIS centered on four basic points: (1) ULIS was conceived primarily in the light of external trade between common boundary nations geographically near to each other; (2) ULIS devoted insufficient attention to international trade problems involving overseas shipments; (3) ULIS did not balance the reciprocal rights and obligations of sellers and buyers, viewed in the light of practical realities of trade practices; and (4) ULIS would not be understood by individuals in the commercial field.[74] These objections were shared by a number of other states.[75]

The United States' late entry into the negotiations,[76] its lack of preparation for the Conference, and an extremely hasty drafting process,[77] however, meant that the U.S. delegates could suggest relatively few changes in ULIS.[78] This failure ultimately forced the [page 631] delegation to conclude it "unlikely that . . . [ULIS] will prove acceptable to the United States's governmental, commercial, and legal organizations because its many unclear and unworkable provisions do not meet the current needs of commerce. . . ."[79]

The Third World and Socialist States also raised a number of objections to ULIS. They objected to the domination of the Conference by the developed Western European nations,[80] asserting that the domination resulted in a ULIS Convention strongly favoring the industrial states.[81] At the least, they found many provisions of the ULIS unclear and unfamiliar.[82]

3. Trade Usage Provisions

The provisions in ULIS and ULF referring to trade usage were a major stumbling block for the United States.[83] The provisions at issue were article 9 ULIS and article 13 of ULF. Article 9 of ULIS provided that:

"(1) The parties shall be bound by any usage which they have expressly or impliedly made applicable to their contract and by any practices which they have established between themselves.

"(2) They shall also be bound by usages which reasonable persons in the same situation as the parties usually consider to be applicable to their contract. In the event of conflict with the present Law, the usages shall prevail unless otherwise agreed by the parties.

"(3) Where expressions, provisions or forms of contract [page 632] commonly used in commercial practice are employed, they shall be interpreted according to the meaning usually given to them in the trade concerned."[84]

Article 13 of ULF provided that:

"(1) Usage means any practice or method of dealing, which reasonable persons in the same situation as the parties, usually consider to be applicable to the formulation of their contract.

"(2) Where expressions, provisions or forms of contract commonly used in commercial practices are employed, they shall be interpreted according to the meaning usually given to them in the trade concerned."[85]

The U.S. delegates believed that these ULIS provisions failed to conform to U.S. commercial practice and would not be understood by U.S. merchants.[86] ULIS took a normative approach to trade usage in Article 9(2) by making binding only that usage "which reasonable persons in the same situation as the parties usually consider applicable to their contract." The focus of article 9(2) was on what merchants should do, not on what they actually did. U.S. merchants seek binding usages in behavior, not in norms.[87] It was therefore not surprising that the Delegation felt ULIS would not be understood by merchants.[88]

E. CISG and Trade Usage

Despite the haste in drafting ULIS,[89] its proponents believed that "any agreement, defective though the agreement might be in certain respects, was better than no agreement at all."[90] ULIS's proponents feared that if a Convention was not adopted, after thirty years of preparation, all future attempts to secure a uniform international sales law would fail because of the growing strength of regional and national codifications.[91][page 633]

Professor Tunc, a leading proponent of ULIS and a civil law jurist, articulated yet another concern at the time.[92] He feared that the strong civil law influence in ULIS would be lost in future unification attempts.[93] Tunc believed that future drafting efforts would be dominated by "the common law countries armed with their Uniform Commercial Code and their Sales of Goods Act."[94] Although the hopes of Professor Tunc and others for ULIS were disappointed by its poor reception,[95] a new unification movement began almost immediately despite the fears that ULIS was the last chance to secure a uniform international sales law.

1. Development of CISG

In 1966, amid growing criticism of the ULIS and the ULF Conventions, Hungary called for the United Nations to become involved in the unification of international trade law.[96] With the inability of the 1964 Conventions to achieve widespread acceptance becoming increasingly apparent, the Hungarians and other proponents hoped that a U.N. project with broader representation by non-Western States would receive more extensive support.[97]

In response to the Hungarian call, the General Assembly established the United Nation Commission on International Trade Law [UNCITRAL] in 1966.[98] Initially UNCITRAL focused on ULIS to determine whether changes in the existing text might make it more acceptable to the legal and economic systems of various countries.[99] By UNCITRAL's second session in 1969, however, it was [page 634] apparent that ULIS would not be accepted without extensive alteration. A fourteen-member Working Group was established to begin drafting a new text.[100]

The Working Group produced a Draft Convention on the International Sales of Goods in 1976 [101] and a Draft Convention on Formation of the Sales Contract in 1977.[102] In 1978, the full Commission reviewed the drafts and combined them into a single Draft Convention on Contracts for the International Sale of Goods.[103] The final draft CISG was approved, after some modifications, at the diplomatic conference in Vienna in 1980.[104][page 635]

Most U.S. objections to ULIS were addressed adequately in the 1980 Draft CISG.[105] The United States Delegation signed the Convention in 1981, and President Reagan forwarded it to the Senate for ratification in September, 1983.[106]

2. The Politics of Usage: Development of Article 9

The increased representation of Third World and Socialist nations in the UNCITRAL Commission and the CISG Working Group [107] affected the course of negotiations. Although UNCITRAL was described by Professor Farnsworth, a long-time U.S. delegate, as "a highly professional and an apolitical group"[108] that operated by consensus,[109] the increased political and legal heterogeneity of the drafters [110] meant that more compromises were required in the CISG negotiations than in those that led to ULIS.

During the conference the most politically charged issues were often the technical ones.[111] Trade usage was a highly political issue that generated considerable debate. Professor Farnsworth has commented:

"Viewed in the context of the United Nations, [trade usage] become[s] political. Generally, developed nations [page 636] like usages. Most usages seem to be made in London, whether in the grain or cocoa trade, for example. Developing countries, on the other hand, tend to regard usages as neo-colonialist. They cannot understand why the usages of, let us say, the cocoa trade should be made in London. And usages are looked on with perhaps even more suspicion by the Eastern European countries because the Eastern Europeans . . . like to have everything in their files. There is nothing more distressing to a bureaucrat than the thought that some Englishman or Ghanian is going to appear and claim that there is a usage that he does not have in his file."[112]

Professor Eörsi, President of the Vienna Conference and a Hungarian delegate,[113] observed that:

"In the course of unification of the rules of international trade, East-West conflicts have not been typical: nor were they at the Vienna U.S. Conference. Nevertheless, on [a number of] issues the front lay more or less between the Socialist and Western legal systems. [Among these were] the scope of application of usages."[114]

a. Basic Attitudes Towards Trade Usage

The trade usage provisions of CISG were developed through a series of drafts, beginning with consideration of the ULIS text and concluding with the final version of article 9. Lebedev, a Soviet delegate to the Vienna Conference, observed that article 9 was one of the most fiercely-debated issues during the preparatory discussion.[115] The final draft was therefore dependent upon compromise.[116] A fuller understanding of article 9 may be obtained by tracing its development through the process of political compromise and negotiation.[117][page 637]

i. The U.S. Perspective on Trade Usage

From the United States' perspective, "one of the important features of the CISG Convention is its legal provisions.[118] The modern U.S. approach to trade usage is exemplified in the Uniform Commercial Code [U.C.C.]. The Code drafters sought to facilitate commercial exchange by creating a commercial law that based its rules in the practices of merchants.[119] To accomplish this goal, the drafters established a detailed system of implied incorporation of a vast array of trade usage and courses of dealing into every contract.[120] Contracting parties are free to vary their contract terms from the standard trade usage and course of dealing, but they must do so expressly in the contract.

The Comments to U.C.C. Section 1-201(11) note that the Code is "intended to include full recognition of usage of trade, course of [page 638] dealing, course of performance and the surrounding circumstances. . . ."[121] Section 1-205(2) defines trade usage as "any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question."[122] Under this approach, "full recognition is thus available for new usages and for usages currently observed by the great majority of decent dealers, even though dissidents ready to cut corners do not agree."[123]

The Parties do not have to be aware of the trade usage under the Code approach. Section 1-205(3) provides that "any usage of trade in the vocation or trade in which they are engaged or of which they are or should be aware [may] give particular meaning to and supplement or qualify terms of an agreement."[124] Therefore,where the parties have used a term with one meaning in lay terms, but a different meaning under an applicable trade usage, courts generally admit the trade usage into evidence.[125] For example, if the contract called for the seller to deliver a chicken and trade usage defined a "chicken" as young chickens, the usage would be admitted into evidence if the seller delivered old chickens.[126]

Perhaps the most controversial issue in the U.S. view of trade [page 639] usage is that of "careful negation."[127] Comment 2 to Section 2-202 states that "[u]nless carefully negated [trade usages] have become an element of the meaning of the words used."[128] The courts have differed over the extent to which merger clauses [129] carefully negate applicable usages so as to bar the admission of trade usage to vary the terms of the agreement. Some courts have required that there be "specific reference to" the usage in the merger clause for them to be excluded.[130] However, some courts have held that in the presence of a merger clause, trade usage may not vary contract terms specifications.[131] A similar dichotomy exists as to additive uses of trade usage.[132]

The Uniform Commercial Code's approach to commercial law naturally affected the U.S. delegation's approach to the CISG negotiations. The Delegation's goal was a Convention which conformed to commercial practice.[133] Hence, the delegates made trade usage provisions an important part of their negotiations.[134]

ii. The Socialist Perspective on Trade Usage

Socialist trade specialists also acknowledge a role for trade usage in regulating international sales agreements.[135] However, they [page 640] adopt a more limited role than their U.S. counterparts. The limited role of trade usage in Socialist law is because Socialists believe that trade usage has "been formed by a restricted group of countries . . . whose position did not express world wide opinion."[136] As a result, most Socialist states do not permit trade usage to vary mandatory legal rules or contract specifications.[137] As the Soviet UNCITRAL representative observed, "[u]sages [are] often devices established by monopolies and it would hence be wrong to recognize their priority over the law."[138] Even at the final debate on article 9 at the Vienna Conference, a number of Socialist states continued to argue that trade usages not expressly referred to in a contract should apply only if they did not contradict the contents of the Convention.[139]

Trade usage and custom are often used by Socialist arbitral panels,[140] both to interpret contracts and to fill in gaps.[141] Before applying the usage, Socialist arbitrators generally require that it (1) be proved by reference to trade literature or experts;[142] (2) be universally recognized in the trade; (3) be the sole usage on point; and (4) be clear and concrete.[143] The final requirement was reflected in the concern of several Socialist states that binding usage under the CISG be limited to international, not domestic, usage.[144]

Eörsi, the Hungarian delegate, summarized the Socialist view as [page 641] giving "priority to the security of the contract and foreseeability lest the contracting parties be taken by surprise."[145] The need of planned economies for security and foreseeability in contractual relationships no doubt accounts for much of the suspicion with which the Socialist States view trade usage.[146]

3. Development of Article 9

It is with the U.S. and Socialist perspectives in mind that we trace the development of Article 9.

i. The Draft Convention

The 1978 CISG Draft Convention incorporated trade usage in article 8 and gave it legal effect:

"(1) The parties are bound by any usage to which they have agreed and by any practices which they have established between themselves.

"(2) The parties are considered, unless otherwise agreed, to have impliedly made applicable to their contract a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contract of the type involved in the particular trade concerned."[147] [page 642]

In one of the more controversial aspects of the 1978 Draft, comment 5 to article 8 preserved the U.S. view that usage should prevail over contrary provisions of the Convention.[148] Czechoslovakia argued unsuccessfully that allowing trade usage to supersede the Convention would cause serious legal uncertainty and would be unfair because developing countries did not participate in the evolution of usage.[149] Therefore, the Czechs argued that "usages should have preference . . . only in the case when the contracting parties express their will that the usage will be applied in this manner."[150]

Norway argued that article 8 of the Draft should be amended to make clear that the Convention was not concerned with the validity of any particular usage.[151] This suggestion was adopted in article 4(a) of the final CISG Convention.[152] Sweden, Yugoslavia and the International Chamber of Commerce argued unsuccessfully that article 8(3) of the ULIS Draft, which provided for the interpretation of trade terms "according to the meaning usually given to them in the trade concerned," should be reintroduced.[153][page 643]

ii. The Vienna Conference and the Final Version of Article 9

The 1978 CISG draft version of the trade usage provisions survived the 1980 Vienna Conference reasonably intact and was incorporated in the final CISG Convention. The unsuccessful amendments to the provisions largely reflected the political positions of their proponents. For example, Czechoslovakia renewed its argument that usage should not supersede the Convention. It proposed an amendment to add the words "provided the usage is not contrary to this Convention" at the end of paragraph 2 of article 9.[154] The Czechoslovakian proposal was supported by several socialist states.[155] However, the Mexican delegate argued successfully that if a usage met the needs of the parties more precisely than the Convention, the usage should in general prevail.[156]

A Chinese proposal to limit binding usages to those which are "reasonable,"[157] received some support from the Socialist states [158] but was ultimately rejected.[159] As the Pakistani delegate observed, "the very existence of a usage implied recognition of its reasonableness."[160]

If the absence of proposed amendments indicates a lack of dispute, then paragraph (1) of Article 9 was entirely acceptable to the Conference.[161] A number of substantive amendments were suggested,[page 644] but only one was adopted.[162] The successful amendment, proposed by the United States, added the words "or its formation" following the words "applicable to their contract" in paragraph (2) of article 9 and was accepted by a vote of 19 to 17.[163] The final version adopted by the Conference thus read:

"(1) The parties are bound by any usage to which they have agreed and by any practices which they have established between themselves.

"(2) The parties are considered, unless otherwise agreed, to have impliedly made applicable to their contract or its formation a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned."[164]

II. Trade Usage Under the Convention: A Legal and Economic Comparison

The first step in analyzing any commercial code is determining the principles upon which interpretation is based. For the 1964 ULIS Convention, matters not expressly settled by the Convention are to be determined "in conformity with the general principles on which the present Law is based."[165] Unfortunately, ULIS never clearly states what the "general principles" are.[166] Commentators and courts may use differing general principles, resulting in differing interpretations.[167] This lack of general principles upon which to base interpretation of ULIS, as well as the absence of case law interpreting the Convention,[168] exacerbate the uncertainties already extant in its provisions. Under the 1980 CISG Convention, however, principles of interpretation are better defined. To promote [page 645] uniformity, CISG is to be interpreted based on "physical events that occur in international trade"[169] and "in a manner that permits [trade] to grow and adapt to novel circumstances and changing times."[170] The emphasis of CISG is in what happens in the commercial world, rather than on what the drafters thought should happen. Thus, interpreting CISG is considerably simpler than interpreting ULIS.

A. Assumptions Underlying an Economic Analysis of Trade Usage

A number of assumptions underlie an economic analysis [171] of the CISG trade usage provisions. These assumptions can be broken down into three categories: 1) assumptions about the nature of commercial parties; 2) assumptions about the role of the legal system; and 3) assumptions about the nature and role of trade usage.[page 646]

The underlying principle upon which economic analysis is based is that the law, by adopting efficient rules, "works to enhance the benefits that society as a whole derives from promise-making."[172]

The normative view that efficiency should override other values assumes that wealth redistribution is costless. Where efficiency and equity conflict, the law can initially opt for the efficient result so as to optimize the benefits from the use of social resources, and then, if desired, redistribute wealth to reach an equitable distribution of the resulting benefits.[173] Unfortunately, in the real world costs of wealth redistribution are rarely zero and can often be significant. Therefore, the decision-maker must decide between these competing norms. Considerations of wealth distribution, or other social policies, may dictate a non-efficient result. In addition, widely shared moral notions may dictate that a non-efficient result be reached.

Merchants, however, are assumed to maximize the efficiency of their transactions. Merchants and commercial firms make "decisions in such a way that [their] profits will be as large as possible."[174] Furthermore, merchants can be assumed to be acting at arms-length, from roughly equal bargaining positions, and with similar goals. In this context, notions of fairness and morality are less important than efficiency, as long as competition is restrained within socially desirable bounds.[175] Since this Note only considers transactions between merchants, it will therefore assume that efficiency is the principal goal of the commercial law.

1. Assumptions About the Nature of Commercial Parties

Economists make a number of assumptions about the behavior of individuals. One of the most important assumptions is that "man is a rational maximizer of . . . his 'self-interest.' "[176] In the [page 647] commercial context this means that the parties' main goal is to maximize profits.[177] Negotiating a contract clause to cover every contingency can be very expensive.[178] If the law can provide gap-filler rules to deal with potential contingencies, the parties' negotiation and transaction costs will be reduced.[179] Rational commercial parties are therefore assumed to desire that the law provide such gap-filler rules.[180]

Merchants are also assumed to be commercially competent, informed, and solvent. Commercial competence implies that merchants are making decisions which maximize self-interest and are able to fully understand contracts. Informed implies that merchants are aware of market conditions, such as prices and applicable trade usage. Solvent implies that merchants have free choice as a result of adequate funding to enable them to act in the market with free choice.[181]

2. Assumptions About the Role of Legal Rules

Explicit in the assumptions made by economists about behavior is the notion that societies as well as individuals respond to incentives. Under a market system the decision maker will usually opt for an alteration that increases economic efficiency in resource use, thus increasing the level of social satisfaction.[182] The way this decision is made is important because resources are scarce in comparison to society's needs, and society must efficiently allocate those resources to individual users.[183] This allocation may conflict with the "self-interest" of those individuals, creating a need for some method of regulating competition for social resources. The question for society is how should resources be allocated and how should that allocation be regulated.[page 648]

In capitalist economic systems, resources are largely allocated through contract and commercial law rules.[184] These laws are generally non-mandatory, which means that the parties are free to alter legal rules by adopting a contrary contract clause.[185] The Coase Theorem [186] implies that, given this freedom and certain assumptions, the parties will reach the most efficient result regardless of what the legal rule is.[187] For example, if judges are efficiency-adverse, meaning that they will not enforce efficient rules or contract clauses, commercial parties, being efficiency-preferrers, will reach the efficient result by contract and provide for private extra-judicial enforcement such as arbitration.[188]

Generally speaking, legal rules may be evaluated in one of two ways: whether the rule will do justice between the parties to the dispute at hand or whether the rule will regulate the activities of future parties in similar disputes. The first perspective allocates present losses; the second seeks to deter future losses.[189] If the goal of commercial law is to promote efficiency, the future deterrence perspective is the most appropriate. Efficiency dictates that the costs of transactions must be minimized. If liability is imposed in such a way that parties will be able to adjust their behavior in the future so as to avoid liability, i.e., by putting liability on the parties who have most cheaply avoided the loss, then the future costs of transactions will be reduced.[190] By doing so the law forces parties with idiosyncratic behavior to adjust their behavior so as to avoid future losses.[191][page 649]

If commercial law really desires efficiency, it will seek to reduce the costs of conducting commercial transactions by adopting gap-filler rules. Gap-filler rules are rules that most parties prefer,[192] rules the parties can use "off-the-rack," and rules that are a part of the contract even where the parties are silent. On the other hand, when the legal rules are different from the common commercial expectation, the parties must take costly precautions including conducting longer, more detailed negotiations, and providing for extra-judicial enforcement such as arbitration. This process is inefficient and significantly reduces the value of the exchange.[193] An efficient legal system, however, may not be concerned solely with costs to the parties.

Professor Guido Calabresi has suggested that the law should consider three factors.[194] First, the law must consider the "primary costs," the parties' losses.[195] Second, the law should consider "secondary costs," those involved in shifting the loss, or risk of loss, between the parties.[196] These include the costs associated with bargaining. Lastly, the law should also account for "tertiary costs," the costs of administering the dispute resolution system.[197] In general, the parties bear only primary, and some secondary, costs. A legal rule that forces parties to engage in additional bargaining increases the secondary social costs associated with a transaction as well as the parties' costs. The true social cost of a transaction is the sum of all three cost factors.[198] The most socially-efficient rule, therefore, will be that which minimizes the total social cost.

3. Assumptions About the Nature and Role of Trade Usage

By definition, trade usage is the practice that most parties pursue [page 650] in a given situation.[199] Most parties expect trade usage to apply to a contract. Presumably, a rule binding the parties to applicable trade usage, absent a contrary contract clause, allows the parties to reduce the amount, and thus the cost, of bargaining. This assumes that the savings achieved through the use of binding trade usage is greater than the cost of losses resulting from usage-related misunderstandings and disputes. If the assumption is correct, trade usage has substantial individual and social benefits. Reducing the costs of negotiating increases the parties' profits, thus increasing the overall wealth of society. The substantial use of trade usage by merchants,[200] and the significant role that trade usage plays in diverse legal systems [201] lend inferential support to the assumption that the savings from trade usage is greater than their costs. A related assumption is that trade usage is fairly homogeneous, well-known and easily accessible to merchants entering the field.[202] Only if this assumption is correct would the trade usage be the rule that most parties will follow.

B. Binding Usage

Under ULIS, trade usage was incorporated into the contract if done so explicitly, or implicitly, by the parties, or if "reasonable persons" in the parties' situation usually follow trade usage.[203] Under CISG, however, trade usage is binding if: 1) the parties explicitly agree to be bound; or, 2) the parties "knew or ought to have known" of the usage and the usage is "widely known" and "regularly observed" in international trade by similar parties in the same trade.[204]

If the usage meets this test, it is either explicitly, or implicitly, incorporated into the contract, depending on which prong is met. In either case, the usage "will be applied rather than conflicting [page 651] provisions of [the] Convention on the principle of party autonomy."[205] Under both Conventions, usage explicitly incorporated into the contract binds the parties. The more difficult issues are raised by usage not explicitly mentioned in the contract. Among these issues are what usages were "impliedly" incorporated into the contract under ULIS article 9(1),[206] the meaning of the "reasonable persons" language of ULIS article 9(2),[207] the relevance of custom and customary law, and the distinction between domestic and international usages.

1. Implied Incorporation of Usage

Under ULIS article 9(1) the parties were "bound by any usage which they have . . . impliedly made applicable to their contract. . . ." What distinguishes article 9(1) from article 9(2) is unclear. Jokela and Karlgren argue that the distinction between paragraph (1) and (2) represented an incorporation of the Continental approach to trade usages. They believe that "factual" usage was incorporated by implication through article 9(1), while usage that had the effect of customary law, usages normatifs, was incorporated through article 9(2).[208] As Karlgren notes, the chief impact of the distinction was that "factual" usage did not necessarily overrule applicable legal rules.[209] Disregarding the reasonableness issue, the practical difference in interpretation of usage through paragraphs (1) and (2), under either the U.S. or Continental, approach was thus probably minimal. Of course, the differing theories about usage, coupled with the lack of a clear choice between them in the ULIS text, might have led to differing interpretations that would contribute to uncertainty as to result from state to state. This uncertainty could have forced the parties to bargain explicitly over the usage applicable to the contract or to provide for extra-judicial dispute resolution.[210]

Unfortunately, another interpretation of the distinction was possible.[page 652] Since the usage which was incorporated through paragraph (2) is that which is usually followed by reasonable parties, paragraph 1 may have created an "inference that abnormal rules are applicable to the construction of the contract."[211] One could argue that if regularly followed usages were incorporated through paragraph (2), paragraph (1) would have been unnecessary unless it meant that usage incorporated through implication could include usage that was not widely followed in trade, but rather inferred by a court into the parties' agreement. A court following this reasoning could have bound the parties to a usage that did not create an expectation that it would be binding and which, in commercial practice, would not apply. This deviation from normal commercial expectation would have forced the parties to engage in additional bargaining, so as to avoid the application of such "abnormal rules."

While the Jokela/Karlgren view of the distinction seems more persuasive, this uncertain interpretation of ULIS would have increased secondary and tertiary costs, if the Convention was ever widely accepted. A narrower rule, with a clear definition of what usage is binding, would have created fewer cost problems. CISG eliminates the notion of making "abnormal usages" binding through implication. The 1980 Convention omits the phrase "expressly or impliedly" in article 9(1) and instead adopts a rule that abnormal usage, not of regular observance, cannot bind parties absent explicit agreement to do so.[212] This provision should reduce the amount of bargaining required.

2. The Reasonable Person

Article 9(2) of ULIS bound the parties to usage which reasonable persons in the parties' position usually follow.[213] This provision was the subject of substantial criticism and debate. Third World critics argued that it bound developing states to trade usage which they had no part in formulating, that it was an ambiguous concept which commercial parties would not understand, and that it treated usage from a normative perspective rather than the more appropriate behavioral viewpoint.[214][page 653]

In early UNCITRAL sessions the Working Group observed that the "reasonable persons" language "could give rise to doubts and uncertainty. '[R]easonable persons' from different parts of the world might consider different usage applicable to the contract since usage may differ from one region to another."[215] Suppose that a trade usage in country A is for widgets to be green, the usage in country B is for yellow widgets, and in international trade the usage is that widgets are not colored. If a seller from country A ("A") is to deliver widgets to a buyer in country B ("B"), A faced some uncertainty under the ULIS rule as to which usage applied. If reasonableness is interpreted by the court to be what most parties would apply,[216] there may have been no substantial difficulty. Because of the vagueness of the "reasonable persons" language, however, a court could have frustrated the parties's intent by holding that reasonable merchants would not have followed the usage in question. As with the other uncertainties inherent in article 9, paragraph (2) might have increased the costs of transacting by forcing the parties to engage in additional bargaining.

By introducing a reasonableness analysis focused on what the parties should do rather than on what they actually do,[217] the ULIS Convention permitted a court to substitute its own normative opinion of a usage for the pattern of commercial practice that created the usage.[218] With such uncertainty, parties could not have taken the usage for granted. If they wanted to make sure it would or would not apply to the contract, they would have had to say so explicitly in the contract. Alternatively, the parties could have provided for private arbitration, which tends to concentrate on actual trade practice, but arbitration also imposes additional secondary bargaining and resolution costs. Moreover, forcing commercial parties to use such techniques would defeat the purpose of a uniform law in the first place.

The reasonableness requirement also created an increase in tertiary costs. Proving usage can be difficult and costly,[219] even without [page 654] requiring a reasonableness analysis. Courts find it difficult to determine what all parties are required to do under a contract without also having to determine whether the parties are reasonable. While it is certainly possible for a court to decide that the practice of a minority is reasonable, and that of the majority is unreasonable,[220] the reasonableness analysis added a costly and complex issue to litigation.

The CISG drops the "reasonable person" portion of the ULIS test. The rejection of the Czech amendment to insert the word "reasonable" prior to "usage" in paragraph (2) clearly indicates that the drafters intend that courts not reject usage on normative grounds.[221] By concentrating on commercial practice rather than on normative analysis, CISG should reduce secondary and tertiary costs. Courts will no longer have to engage in an analysis of whether reasonable parties would follow the practice. The "determining factor" will be "whether [the usage] was 'widely known to,and regularly observed' by parties to contracts of the type . . . in such a case it may be held that the parties 'ought to have known' of the usage."[222]

Instead of a reasonableness analysis, CISG uses an objective standard of knowledge. Parties are bound by usage which they "knew or ought to have known."[223] Thus, an idiosyncratic party who does not know of the usage is properly held responsible if a misunderstanding arises. Through this provision, CISG significantly reduces the potential for, and cost of, future misunderstandings in that idiosyncratic parties are given an incentive to study trade usage. A party's expectation that the other party to its contract knows of, and is bound by, the usage is protected.[224] In the hypothetical, assume that the international usage for unpainted widgets is the applicable usage. If trader "A" begins bargaining with trader "B," "A" will simply assume "B" knows of the applicable usage. Trader "A" further assumes that the applicable usage will be part of the contract unless "B" objects. If "B" sues "A" for failure to deliver yellow widgets, the CISG will place liability on "B" This should again reduce future secondary and tertiary costs.[page 655]

3. Custom and Customary Law

The old English definition of trade custom is a practice that "has been recognized by a court of law, in some binding judicial precedent."[225] According to the Old English definition, customs are binding regardless of the intent of the parties.[226] The burden of proving that the custom no longer exists and that a new one has replaced it can be extremely difficult to bear.[227] The main problem with the old English definition of trade custom, however, is that judicially-established custom will often reflect "the expectations of a different type of commerce and another age."[228]

The definition of usage in the Uniform Law on the Formation of Contracts probably did not include the concept of custom, as article 13 seemed to require "a general feeling as to the validity of the usage in question among reasonable" commercial parties.[229] This seemed to imply some degree of current practice. In ULIS, however, substantial uncertainty in the trade usage definition permitted a variety of interpretations of the rule.[230] Thus, a national court, in a nation following the old English custom rules, could have inferred that old English custom into ULIS. The likely response of commercial parties to such an approach would have been to include private arbitration or choice of law clauses in the contract that would have barred the application of outdated, but still legally binding,[231] customs to resolve their disputes. Once again this additional bargaining would have increased the cost of the transaction.[232]

While it seems unlikely that the ULIS drafters intended to import the English concept of custom into their definition of usage, several commentators argued that the rules of ULIS were wide [page 656] enough to include both the U.S. and the Continental approach to trade usage.[233] While there is little practical difference between the U.S. and Continental approaches,[234] the Continental approach would have created confusion and generated additional costs. The Continental Codes [235] distinguish between "factual" usages, i.e., those which must be incorporated explicitly or implicitly into the contract by the parties, and those usages which are so widely followed as to have the force of customary law.[236] Parties would have been confused with the Continental approach when they found binding usages, which were not widely followed in current commercial practice, implicitly incorporated into their contracts.[237] As a result of this confusion and uncertainty, costs would have increased.

The CISG clearly rejects both custom and customary law as sources of binding usages. Rather the CISG emphasizes current practice with its test of usage widely known and observed.[238] This aspect of the CISG rule should reduce uncertainty costs.

4. The Distinction Between Domestic and International Usage

Another source of uncertainty associated with the ULIS usage rule was related to the distinction between domestic usage and international usage. As the Japanese UNCITRAL representative observed, under the ULIS version of article 9 it was "not clear whether 'usage' meant usage in the world at large or in a particular region or country."[239] Jokela interpreted article 9 to incorporate both domestic and international usage. For him the key issue was what relevant usage has "the most real connection" to the contract.[240] This test has obvious question-begging problems. For instance, in the widget hypothetical, it is certainly not obvious which usage has "the most real connection to the transaction." Presumably, under article 9(2) one would look at what usage reasonable persons engaged in the widget trade between countries A and B [page 657] usually follow. However, this would entail significant proof costs, and would be difficult to determine if the volume of widget sales between A and B was small. Thus, to the extent that trade usage varies between nations, uncertainty about which usage the ULIS Convention contemplated as binding is exacerbated.

Under the CISG rule this uncertainty is partially alleviated, although some confusion will still be possible. At the CISG Convention, India proposed an amendment to delete the words "and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned" in paragraph (2), but the change was rejected.[241] The Indian delegate suggested that the phrase was both redundant and contradictory.[242] However, it was felt by several delegates that the existing language was "more specific and would thus avoid possible misunderstandings" as to which usage would be binding.[243]

Under CISG, the usage must be one widely known in international trade and "trade may be restricted to a certain product, region or set of trading partners."[244] The issue under the CISG is whether the parties knew or ought to have known of the usage.[245] Varying the widget hypothetical slightly, suppose most international widget sales contracts between countries A and B adopt the usage of country A. Under comment 3 to article 8 of the Draft CISG,[246] this usage takes precedence over the normal international usage. Thus, the CISG rule is that widely known domestic usage is applicable under article 9 if it is widely known and observed by international traders.[247][page 658]

C. Other Issues

Three additional issues should be analyzed. These are: (1) the role of usages in interpreting contracts; (2) the resolution of usage law conflicts; and (3) the absence of a requirement of careful negation.

1. Usages as Interpretative Devices

Article 9, paragraph (3) of ULIS explicitly provided for the interpretation of trade terms by their usual meanings. Thus, a usage which defines some terms would be admissible to prove the parties' intent in using that term. Under CISG, the situation is less clear. At the CISG Convention, Egypt proposed to add a paragraph, similar to paragraph (3) of ULIS, to Article 9: "Where expressions, provisions or forms of contract commonly used in commercial practice are employed, they shall be interpreted according to the meaning usually given to them in the trade concerned.[248] The amendment failed.[249]

Clearly, CISG Article 9 allows the parties to use usages as gap-fillers. "[O]n points where the contract is silent, commercial practice is given effect" through binding usages.[250] The applicable usage "has the same effect as a contract" between the parties.[251] However, CISG is unclear on whether a usage is admissible to interpret the meaning of terms used in the contract. The Commentary to the Draft Convention states that CISG "does not provide any explicit rule for the interpretation of expressions, provisions or forms of contract which are widely used in international trade and for which the parties have given no interpretation."[252] Nonetheless Article 8, paragraph (3), states that "[i]n determining the intent of a party . . . due consideration is to be given to . . . usages. . . ."[253] Although this principle directly applies only to determine the intent of one of the parties,[254] arguably it also applies to interpreting contract terms.

Honnold observes:[page 659]

"Under Article 9(2) of the Convention, usages are impliedly a part of the Contract 'unless otherwise agreed.' This should not bar a tribunal from construing general provisions of the contract in the light of applicable usage since words commonly used in commerce ('draft,' 'order,' 'bill,' 'average') carry a heavy and complex burden of meaning based on the practices with which these words have been associated. A contract provision (like a fish out of water) loses its life when it is removed from its setting."[255]

However, the most uncertain part of CISG is its failure to include paragraph (3) of ULIS' article 9 that most increases uncertainty. From the point of view of efficiency, the inclusion of paragraph (3) in ULIS is preferable to its omission in CISG. Assuming that the courts read the ULIS version into the Convention, as Honnold suggests they will, trade usage under CISG article 9 will serve both interpretative and additive rules. The parties will not need to bargain out of a contract clause to cover every potential contingency, because trade usage will provide for many contingencies. Also, the parties need not negotiate every term in the contract, because trade usages under the CISG will serve that purpose as well. This reduces the cost of contract bargaining by allowing the parties to assume that the court will apply the trade usage appropriately. Because there is no requirement of "reasonableness," there should be no opportunity for courts to bar even usage which significantly varies the "plain meaning" of contract terms.

Properly interpreted, CISG will permit the parties to assume that even usage that "boggle[s] the reasonable mind" will apply to the contract, provided the usage is of sufficiently widespread practice. Given the apparent desirability of such an interpretation, the Administration should seek a modification of the CISG incorporating such a rule when a future opportunity for modifying CISG arises.

2. Resolution of Law-Usage Conflicts

One of the assumptions of the economic analysis is that parties would rather be bound by applicable trade usage than by contrary [page 660] legal rules. If the law supersedes contrary usage, the parties will have another reason to seek extra-judicial enforcement. By adopting the contrary rule, ULIS, in Article 9(2) adopted the rule most parties are presumed to prefer, thus minimizing secondary and tertiary dispute resolution costs.

Under CISG, usage "will be applied rather than conflicting principles of [the] Convention on the principle of party autonomy."[256] The rule is not explicitly stated in article 9, probably because of objections by the socialist states.[257] It is, however, implied by the text of article 6 which permits the parties to contractually "derogate from or vary the effect of any of [the CISG's] provisions." Since an "applicable usage has the same effect as a provision of a sales contract," the deletion of the explicit rule of ULIS article 9(2) should have no effect.[258] As with the ULIS version, this rule is probably more efficient. By giving sway to trade usages, the CISG removes the need for parties to negotiate a way around the general rule. As the Mexican CISG delegate observed, if the parties prefer a usage to the legal rule it is because the usage best responds to their needs.[259]

3. Careful Negation

Neither the ULIS nor CISG require that usage be "carefully negated" to be excluded from the contract, as is necessary under the Uniform Commercial Code. Careful negation requires a party to state specifically that the usage is excluded and that it does not apply to the contract. In the absence of careful negation, the trade usage should be admitted.

The argument for requiring careful negation is based on the assumption that usages are widely known and are readily accessible to new actors in the trade. If this assumption is correct and loss results from one party's not knowing of the usage, putting liability [page 661] on that party will create future incentives for that and other parties to familiarize themselves with [the] applicable usage. If this is a desirable incentive, courts should infer a requirement of careful negation.

Careful negation should apply both where the parties simply do not want a trade usage to apply and where they want to replace the rule with a "designer clause." In the former case, if a trade usage would add a warranty to the contract as a gap-filler, for example, and the parties do not want that warranty or any other, they should be required to state that explicitly. In the later case, if the parties want the stated contract quantity to be a fixed quantity, despite a trade usage that would call for it to be an estimate, they would be required to say so clearly. This would alert both parties to the transaction, preventing one party from surprising the other during a dispute, and would make the court's interpretative job easier. Because of the potential efficieny of such a rule, the Administration should consider incorporating a requirement of careful negation when an opportunity to modify CISG arises.

D. Summary

In discussing CISG, Peter Winship, then chairman of the International Sales subcommittee of the American Bar Association International Law Section, observed that "[n]o legal text is perfect. . . . All we can ask is that a text be an improvement on the present state of the law."[260] This observation applies to specific provisions of the text, as well as the text as a whole.

Both the CISG and the ULIS Conventions are attempts to restore the uniformity and flexibility of the law merchant. The law merchant was a fairly efficient legal system, disputes were resolved quickly and according to commercial practice by persons familiar with the expectations and behavior of merchants.[261] The nationalization of the law merchant introduced considerable inflexibility and resulting inefficiency into international trade. ULIS, and to a greater extent CISG, reintroduced a much needed flexibility. The question addressed here is whether they did so in a way that maximizes efficiency.

Uniformity itself tends to increase efficiency. The diversity of national trade laws has tended to make international commerce [page 662] more costly since the parties are required to engage in expensive additional bargaining to avoid difficulties imposed by non-uniformity.[262] On the other hand, if the uniform law imposes higher bargaining costs than the non-uniformity of national laws, nations concerned with efficiency in commercial transactions will decide not to adopt the uniform international law.[263]

"Commercial law is intended to be the formalization of an economic fact. If it does not achieve this, it ceases to fulfil [sic] its true function."[264] ULIS failed to formalize the economic reality of international trade usages. ULIS provisions introduced significant inefficiency through provisions which increased commercial uncertainty.[265] Thus, the decision of most States not to ratify the ULIS convention was defensible economically in the context of trade usage. Undoubtedly the increased bargaining costs imposed by article 9 would have outweighed the benefits of uniformity.

Professor Berman predicted that if the ULIS rules were adopted, "the parties would want to specify in their contracts many of the detailed applications of those rules." He argued that ULIS "would require a very great expansion of the simple contract forms now used in many trades. . . . In many trade associations one might expect to see the emergence of long form contracts." This would reflect a major readjustment in the contract practices of international traders, a readjustment most traders would be reluctant to make due to high bargaining costs.[266] Berman's comments reflect the conclusion of the preceding analysis.

Taken as a whole the CISG text is regarded by most commentators as a substantial improvement over ULIS.[267] The purpose of [page 663] this Note has been to analyze the changes in one specific aspect of the Convention, to ask whether the new convention is an improvement over the old convention, and to suggest that an economic analysis could be applied to other provisions of the Convention to determine its overall efficiency.

A number of improvements over the ULIS text have been noted. The hypothetical widget traders face many fewer uncertainties under the CISG version of article 9. They need no longer be as concerned with which of the usages potentially applicable to their contract is actually that contemplated by the Convention, although admittedly the issue is not certain. They need not fear that a court will invalidate an applicable usage on normative grounds. A court correctly interpreting the ULIS Convention reasonably could have applied to their contract either the old English rule of custom, with its potential for binding them to outdated practices, or the Continental "factual" -- "customary" usage distinction, with its implications for whether the usage overrides legal rules. Under CISG, the parties can be considerably more certain about which usage binds them, and that they have not somehow incorporated an "abnormal" usage by implication. They can, with a fairly high degree of confidence, presume that applicable usage will supersede contrary non-mandatory legal rules. Therefore, although the ULIS approach to trade term interpretation is probably superior, CISG is likely to have less of a negative impact on the parties' bargaining than ULIS would have had.[268] For similar reasons CISG should also decrease tertiary dispute resolution costs.

In short, CISG permits the parties to take trade usage for granted. It properly formalizes and protects the economic reality of commercial practice and expectation by allowing the parties considerable flexibility. The parties' bargaining costs and the legal system's dispute resolution costs should be substantially minimized by this focus on practice and on expectations. Naturally, in many cases the parties will still bargain over such issues as applicable practices, arbitration and choice of law. The extent to which CISG will actually save such bargaining costs may thus be questioned. However, this analysis suggests that at least for trade usage, CISG [page 664] is highly efficient and cost-minimizing, thereby formalizing the economic reality of international commerce. Even though it is not certain that CISG will reduce bargaining costs, CISG certainly will not impose significant additional costs. This analysis supports the view of other commentators that the CISG version of article 9 is, on its own, a substantial improvement over the ULIS text.[269]

Focusing solely on the economic efficiency of the trade usage provision, the United States should ratify the CISG Convention. While there are a number of other factors to consider,[270] and other provisions to analyze by economic efficiency standards, the analysis of the trade usage provisions indicates that merchants will find them efficient and useful in conducting international trade.

III. Conclusion

International trade law originated in the practice and expectation of the party directly effected, the merchant. The ULIS and CISG Conventions attempted to restore the uniformity and flexibility of that earlier law merchant. For a variety of reasons the United States rejected ULIS, a decision which can be defended on grounds of economic efficiency.

Economic efficiency is one basis for the ratification decision on the CISG. The United States has affirmed repeatedly that its major concern with trade law conventions is their effect on commerce.The provisions of CISG on trade usage are highly efficient and should facilitate trade. Application of the principles of this economic approach to the rest of the Convention would determine the overall efficiency of the CISG. If the Convention as a whole reflects the efficiency of the trade usage provisions, ratification would assist merchants in maximizing their return from international transactions.[page 665]


FOOTNOTES

1. Note, United Nations Commission on International Trade Law: Will a Uniform Law in International Sales Finally Emerge?, 9 Cal. W. Int'l L.J. 157 (1979) [hereinafter cited as Note, UNCITRAL]. In 1980 the value of world exports totalled two trillion dollars. Anjaria, Igbal, Kirmani & Perez, Developments in International Trade Policy 16 Int'l Monetary Fund Occasional Paper 71 (1982). Although the growth of international trade has slowed and become somewhat erratic in recent years, that growth is expected to continue for the foreseeable future. Id. at 9.

2. See Note, UNCITRAL, supra note 1, at 157-58. See also Honnold, The Influence of the Law of International Trade on the Development and Character of English and American Commercial Law, in the Sources of the Law of International Trade 70, 74-76 (C. Schmitthoff ed. 1964) [hereinafter cited as Honnold I].

3. Berman, The Uniform Law on International Sales of Goods: A Constructive Critique, 30 Law & Contemp. Probs. 354, 354-55 (1965); Berman & Kaufman, The Law of International Commercial Transactions (Lex Mercatoria), 19 Harv. Int'l L.J. 221, 224-29 (1978); Gal, The Commercial Law of Nations and the Law of International Trade, 6 Cornell Int'l L.J. 55, 65 (1972); C. Schmitthoff, The Law of International Trade, Its Growth, Formulation and Operation, in The Sources of the Law of International Trade 3 (C. Schmitthoff ed. 1964); Note, Contracts for the International Sale of Goods: Applicability of the United Nations Convention, 69 Iowa L. Rev. 209 (1983) [hereinafter cited as Note, Contracts for the International Sale of Goods]. Some differences do exist, however, see, e.g., infra notes 169-220 and accompanying text for a discussion of differing approaches to trade usage.

4. Berman, supra note 3, at 355.

5. Sutton, The Hague Conventions of 1964 and the Unification of the Law of International Sale of Goods, 7 U. Queensland L.J. 145 (1971).

6. Convention Relating to a Uniform Law of International Sale of Goods, July 1, 1964, with Annex, Uniform Law on the International Sale of Goods, 834 U.N.T.S. 109, reprinted in 13 Am. J. Comp. L. 453 (1964) [hereinafter cited as ULIS]. A companion Convention Relating to a Uniform Law on the Formation of Contracts for the International Sale of Goods, July 1, 1964 with Annex, the Uniform Law on the Formation of contracts for the International Sale of Goods, 834 U.N.T.S. 123, reprinted in 13 Am. J. Comp. 472 (1964) [hereinafter cited as ULF], was promulgated at the same time. Both Conventions entered into force in 1972. See infra note 211 and accompanying text.

7. See generally R. Kearney, Report of the Delegation of the United States of America to the Diplomatic Conference on the Unification of Law Governing the International Sale of Goods (1964) [hereinafter cited as ULIS Delegation Rep.]; Berman, supra note 3; Berman & Kaufman, supra note 3, at 264-72; Daw, Some Comments from the Practitioner's Point of View, 14 Am. J. Comp. L. 242 (1965); Farnsworth, Developing International Trade Law, 9 Cal. W. Int'l L.J. 461 (1979) [hereinafter cited as Farnsworth I]; Farnsworth, Some Basic Differences Between the American Law of Sales and the Draft Uniform Law on the International Sale of Goods, 14 Am. J. Comp. L. 227 (1965) [hereinafter cited as Farnsworth II]; Honnold, The Uniform Law for the International Sale of Goods: The Hague Convention of 1964, 30 Law & Contemp. Probs. 326 (1965) [hereinafter cited as Honnold II]; Jokela, The Role of Usages in the Uniform Law on the International Sales, 10 Scandinavian Stud. L. 81 (1966); Nadelmann, The Uniform Law on the International Sale of Goods: A Conflict of Laws Imbroglio, 74 Yale L.J. 449 (1965); Schmidt, The International Contract Law in the Context of Some of its Sources, 14 Am. J. Comp. L. 1 (1965); Note, A Modern Lex Mercatoria: Political Rhetoric or Substantive Progress?, 3 Brooklyn J. Int'l L. 210 (1977) [hereinafter cited as, Note, Lex Mercatoria].

8. See infra notes 113-36 and accompanying text.

9. Winship, New Rules for International Sales, 68 A.B.A.J. 1231, 1232 (1982).

10. Winship, supra note 9, at 1231.

11. Convention on Contracts for the International Sale of Goods, April 11, 1980 U.N. Doc. A/Conf.97/18 (1981), reprinted in 19 I.L.M. 668 (1980), [hereinafter cited as CISG]. On the Vienna Convention, see generally J. Honnold, Report of the United States Delegation to the United Nations Conference on Contracts for the International Sale of Goods (1980) [hereinafter cited as CISG Delegation Rep.]; J. Honnold, Uniform Law for International Sales Under the 1980 United Nations Convention (1982) [hereinafter cited as Honnold III]; Berman & Kaufman, supra note 3; Dore, Choice of Law Under the International Sales Convention: A U.S. Perspective, 77 Am. J. Int'l L. 521 (1983); Dore & DeFranco, A Comparison of the Non-Substantive Provisions of the UNCITRAL Convention on the International Sale of Goods and the Uniform Commercial Code, 23 Harv. Int'l L.J. 49 (1982); Eörsi, A Propos the 1980 Vienna Convention on Contracts for the International Sale of Goods, 31 Am. J. Comp. L. 333 (1983); Farnsworth, UNCITRAL-Why? What? How? When? 20 Am. J. Comp. L. 314 (1972) [hereinafter cited as Farnsworth III]; Lansing & Hauserman, A Comparison of the Uniform Commercial Code to UNCITRAL's Convention on Contracts for the International Sale of Goods, 6 N.C.J. Int'l L. & Com. Reg. 63 (1980); Note, UNCITRAL, supra note 1; Note, A Practitioner's Guide to the United Nations Convention on Contracts for the International Sale of Goods, 16 N.Y.U.J. Int'l L. & Pol. 81 (1983); Comment, A New Uniform Law for the International Sale of Goods: Is it Compatible with American Interests?, 2 Nw. J. Int'l L. & Bus. 129 (1980) [hereinafter cited as Comment, New Uniform Law]; Recent Development, The Convention on Contracts for the International Sale of Goods and the General Conditions for the Sale of Goods, 12 Ga. J. Int'l & Comp. L. 451 (1982) [hereinafter cited as Recent Development, Convention]; Recent Development, International Trade: Uniform Law of Sales, 22 Harv. Int'l L.J. 473 (1981) [hereinafter cited as Recent Development, Trade]. See also Unification of International Trade Law: UNCITRAL's First Decade, 27 Am. J. Comp. L. 201 (1979) (symposium papers by various authors, dealing in part with the Convention); Symposium on International Sale of Goods Convention, 18 Int'l Law. 1 (1984).

12. Winship, Formation of International Sales Contracts under the 1980 Vienna Convention, Int'l Law. 1 (1983).

13. Telephone interview with Peter H. Pfund, Assistant Legal Advisor for Private International Law, United States Department of State (Dec. 12, 1983) [hereinafter cited as Pfund]. The ratifying states are Argentina, Egypt, France, Hungary, Lesotho, and Syria. Those considering ratification are Austria, Bulgaria, the United States, Venezuela, and Yugoslavia. Id. The diversity of the nations, that have ratified, or are considering ratifying, the convention indicates the likelihood of its widespread adoption. CISG will enter into force one year after the tenth ratification. CISG, supra note 11, art. 91.

14. At the 1981 Annual Meeting of the American Bar Association the Section of International Law and Practice proposed a resolution stating that "the American Bar Association supports signature and ratification by the United States of the United Nations Convention on Contracts for the International Sale of Goods and urges the Senate to give its advice and consent to ratification of the Convention . . . " Section of International Law and Practice, Report to the House of Delegates, 18 Int'l Law. 39 (1984). The resolution was adopted without dissent. Winship, Introduction: Symposium on International Sale of Goods Convention, 18 Int'l Law. 3, 4 (1984).

15. See, e.g., Winship, supra note 12, at 1234 (also noting the support of the Secretary of State's Advisory Committee); Comment, New Uniform Law, supra note 11, at 178.

16. Message from the President of the United States transmitting the United Nations Convention on Contracts for the International Sale of Goods, S. Treaty Doc. No. 98-9, 98th Cong., 1st Sess. (1983) [hereinafter cited as President's Message]. It includes a legal analysis of the Convention prepared by the Legal Advisor's Office. Id. at 1-18.

17. Pfund, supra note 13.

18. Application of the Convention to the contract may be excluded at the election of the parties, CISG, supra note 13, art. 6, but if the Convention is ratified it will override the Uniform Commercial Code unless the parties specify otherwise. Note, Contracts for the International Sale of Goods, supra note 3, at 211.

19. A number of scholars have recently argued that application of the social sciences to legal issues can be a useful analytic tool. The social science they rely on almost exclusively is economics. The premises is that the vast majority of commercial actors behave in a way that can be predicted by basic principles of economics, such as the assumption that parties seek to maximize their self-interest (i.e., profits). The field of economic analysis of law and its literature has burgeoned in recent years. See, e.g., Barton, The Economic Basis for Damages for Breach of Contract, 1 J. Legal Stud. 277 (1972); Farber, Reassessing the Economic Efficiency of Compensatory Damages for Breach of Contract, 66 Va. L. Rev. 1443 (1980); Goetz & Scott, Liquidated Damages, Penalties and the Just Compensation Principle: Some Notes on an Enforcement Model and a Theory of Efficient Breach, 77 Colum. L. Rev. 554 (1977) [hereinafter cited as Goetz & Scott, Liquidated Damages]; Goetz & Scott, Principles of Relational Contracts, 67 Va. L. Rev. 1089 (1981); Goetz & Scott, Enforcing Promises: An Examination of the Basis of Contract, 89 Yale L.J. 1261 (1980) [hereinafter cited as Goetz & Scott, Enforcing Promises]; Macneil, Efficient Breach of Contract: Circles in the Sky, 68 Va. L. Rev. 947 (1982); Schwartz, The Case for Specific Performance, 89 Yale L.J. 271 (1979).

20. The international law literature uses a confusing variety of meanings for the term "trade usage" or "trade usages." Here it will normally be used to mean widely observed commercial practices, with appropriate modifications of the definition where necessary.

21. Honnold III, supra note 11, at 112. Accord Presidents message, supra note 16, at 4.

22. ULIS, supra note 6, art. 9; CISG, supra note 11, art. 9.

23. Honnold I, supra note 2, at 78.

24. R. Scott, Contract Law and Theory 3 (1982) (draft materials quoted by permission). Honnold observes that:

"The world's commerce embraces an almost infinite variety of goods and transactions; a law cannot embody the special patterns that now are current, let alone those that will develop in the future.

"Many of these patterns will be reflected in the contract, but there are practical limitations on the ability of the parties to envisage and answer every possible question. Many transactions must be handled quickly and informally. Even when there is time to prepare detailed documents, an attempt to anticipate and solve all conceivable problems may generate disagreements and prevent the makings of a contract; and the most basic patterns may not be mentioned because, for experienced parties, they 'go without saying'." Honnold III, supra note 11, at 251.

25. Honnold I, supra note 2, at 79.

26. See generally E. Farnsworth & J. Honnold, Commercial Law: Cases and Materials 3-15 (3rd ed. 1976); Berman & Kaufman, supra note 3, at 224-29; Gal, supra note 3, at 64-68; Note, Lex Mercatoria, supra note 7.

27. The term law merchant (Lex Mercatoria) was used by Gerard Malynes to describe the medieval "rules governing maritime and commercial activities." Note, Lex Mercatoria, supra note 7, at 212 n.10.

28. Note, Lex Mercatoria, supra note 7, at 212. The same commentator observed that "[t]hese cities expanded the Rhodian Sea Law . . . and the laws of the later Roman Empire to create a 'maritime law [which] tended to become a law common to all nations and peoples,' and which was evolved 'to meet changing, growing requirements of international commerce.' " Id. (quoting F. Sanborn, Origins of the Early English Maritime and Commercial Law 40, 127 (1930)). Although commercial law continued to develop in the maritime context, the law merchant largely developed in the context of overland commercial transaction. See Berman & Kaufman, supra note 3, at 224-25.

29. Note, Lex Mercatoria, supra note 7, at 212-13. Berman & Kaufman observe five characteristics that made the law merchant distinct from the other forms of medieval law:

"1) it was transnational; 2) its principal source was mercantile custom; 3) it was administered not by professional judges, but by merchants themselves; 4) its procedure was speedy and informal; and 5) it stressed equity, in the medieval sense of fairness, as an overriding principle." Berman & Kaufman, supra note 3, at 225.

The fairs were the great commercial centers of medieval Europe, established by royal prerogative and administered by royal officers, sometimes in connection with a merchant. Markets were more local in nature than the fairs, but were administered similarly. E. Farnsworth & J. Honnold, supra note 26, at 3-4; Note, Lex Mercatoria, supra note 7, at 212-14. The law merchant governing the fairs was generally independent of local or royal law. Id. at 212 n.14.

30. Farnsworth & Honnold, supra note 26, at 3 (emphasis added).

31. See Berman & Kaufman, supra note 3, at 225, 269.

32. Honnold I, supra note 2, at 70-71.

33. The origin of this term is disputed. Farnsworth and Honnold suggest that it derives from pie poudre (meaning dusty foot, a reference to the dusty shoes of travelling merchants). Farnsworth and Honnold, supra note 26, at 3 n.1. See also Note, Lex Mercatoria, supra note 7, at 213.

34. Note, Lex Mercatoria, supra note 7, at 213-14.

35. Honnold I, supra note 2, at 70, 71 (emphasis added).

36. Farnsworth & Honnold, supra note 26, at 4.

37. 84 Eng. Rep. 84 (K.B. 1666).

38. Id.

39. See Gal, supra note 3, at 65.

40. Honnold I, supra note 2, at 72, (quoting C. Fifoot, English Law and its Background 130 (1932)).

41. Note, Lex Mercatoria, supra note 7, at 215. By 1690, the situation had deteriorated to the point where Sir Josiah Child observed that "it is well if we can make our own [attorneys] understand one-half of our case, we being amongst them as in a foreign country, our language strange to them, and theirs as strange to us." Farnsworth & Honnold, supra note 26, at 4.

42. Lord Mansfield's tenure began in 1756. Honnold I, supra note 2, at 72.

43. Note, Lex Mercatoria, supra note 7, at 215.

44. Honnold I, supra note 2, at 72. When Karl Llewellyn began drafting article 2 of the Uniform Commercial Code he considered reintroducing the concept of merchant juries to sit on commercial cases. See National Conference of Commissioners on Uniform State Laws, Report and Second Draft, The Revised Uniform Sales Act 253-54 (1941). Criticism by the Commissioners and others forced the drafters to retreat from this proposal. Kirst, Usage of Trade and Course of Dealing, 1977 U. Ill. L.F. 811, 822-23. However, the drafters were not wedded to the idea of a merchant jury -- what they wanted was a way of making sure that the commercial background of the transaction was considered. The drafters achieved their desired result by including provisions relating to trade usage, course of performance, and course of dealings. Id.

45. Honnold I, supra note 2, at 72.

46. Berman & Kaufman, supra note 3, at 226.

47. Honnold I, supra note 2, at 73. Scrutton observed in 1891 that "at the present time English courts are not alarmed by the fact the law they administer differs from the law of other countries." Id.

48. Gal, supra note 3, at 65. For the development of commercial law in the United States, see Farnsworth & Honnold, supra note 26, at 5-8; Honnold I, supra note 2, at 73-74.

49. Berman and Kaufman observe that:

"British jurists did not think of the common law -- now including the law merchant -- as a highly flexible set of principles to be continually reinterpreted in the light of new customs. Once the court declared a custom, it was not generally to be disturbed by inconsistent practices and understandings of merchants. Indeed, in English law it became, and still is, extremely difficult to prove a new commercial custom which contradicts what English judges in previous cases have declared to be the law . . . A parallel development took place in Europe through the adoption of national commercial codes. Almost everywhere the older, more flexible and more cosmopolitan law of commerce yielded increasingly to local statutes. . . . When this process was coupled, as it often was, with a hostility toward proof of mercantile custom, the result was to impede the adaption of law to new economic circumstances." Berman & Kaufman, supra note 3, at 227-28 (footnotes omitted).

To be enforceable at common law a custom had to be ancient, continuous, certain, legal, notorious, obligatory, reasonable, and universal.

The conflict between the need for flexibility and the natural tendency of legal systems to resist changes in established legal rules remains one of the chief problems faced by any commercial law. While this tension may be reduced by the parties' ability to bargain around settled but undesirable law, see R. Posner, Economic Analysis of Law 425 (2d ed. 1977), problems of high transaction costs, mandatory legal rules, and courts reluctant to enforce bargains that derogate the existing legal rules may make resolution of the conflict more important. This note assumes, arguendo, that liberal trade usage provisions are a useful way of resolving this tension.

50. Berman & Kaufman, supra note 3, at 226.

51. Caemmerer, The Influence of the Law of International Trade on the Development and Character of the Commercial Law in the Civil Law Countries, in The Sources of International Trade 88, 90 (C. Schmitthoff ed. 1964). The Napoleonic Code was the inspiration and pattern for the commercial legislation of Belgium, the Netherlands, Poland, Greece, Spain and Italy. Gal, supra note 3, at 65.

52. Farnsworth & Honnold, supra note 26, at 5; Honnold I, supra note 2, at 73;.

53. Id.

54. In Germany codification began with the model statutes Allgemeine Deutsche Wechsel-Ordnung of 1848 and Allgemeines Deutsches Handelsgesetzbuch of 1861, culminating in the general codification of private law in the Burgerliches Gesetzbuch of 1896. Caemmerer, supra note 51, at 90. Caemmerer, supra note 51, at 90. In the United States various uniform commercial acts, including the Uniform Sales Act of 1906, were promulgated by the National Conference of Commissioners on Uniform Sales Laws. J. White & R. Summers, Uniform Commercial Code 2-3 (2d ed. 1980).

Regional codification began with the adopting of the Scandinavian Uniform Acts on Contract by Sweden in 1915, which was followed by Denmark in 1917, Norway in 1918, and Finland in 1929. Schmidt, supra note 7, at 3. The English Sale of Goods Act of 1893 could be considered a regional codification as it applied to the whole Empire, see Note, UNCITRAL, supra note 1, at 160, but the use of region here is intended to encompass only those codifications adopted by several geographically close separate sovereigns. An attempt to produce a uniform European regional commercial code, that of Italian Professor Vittorio Scialoja in the early 1920's, reached the draft stage before being rejected. Bonell, The UNIDROIT Initiative for the Progressive Codification of International Trade Law, 27 Int'l & Comp. L.Q. 413 (1978).

55. Honnold I, supra note 2, at 74-75.

56. Id. at 75.

57. See 1 New York Law Revision Commission, Study of the Uniform Commercial Code 348 (1955). See also Berman & Kaufman, supra note 3, at 228; Honnold I, supra note 2, at 84.

58. Berman & Kaufman, supra note 3, at 228.

59. Id. at 274.

60. See e.g., Id. at 275, (giving Germany and France as examples). English and U.S. courts have generally been more "receptive to appropriate evidence of trade usage [as] a living source of commercial law." Honnold I, supra note 2, at 80. Yet, even in these courts there has sometimes been a "strong presumption that a court's construction of a mercantile contract continues to embody the understanding of merchants of a later day. . . . " Id. This presumption is an example of the conflict between the commercial need for flexibility and the inflexibility of many legal systems, see supra note 70. If the courts resist changes in commercial practice, the result is likely to be an increased reliance by merchants on arbitration.

61. Berman & Kaufman, supra note 3, at 276. See also Hill, The Relevance of Courses of Dealing, Usages and Customs in the Interpretation of International Commercial Contracts, in 2 New Directions in International Trade Law 523-24 (1976).

62. See Note, Lex Mercatoria, supra note 7, at 215.

63. Berman, supra note 3, at 355; see also Recent Development, Convention, supra note 11, at 452.

64. See generally, supra note 7.

65. Honnold II, supra note 7, at 326-27. A number of other international unification projects were attempted at about the same time. In 1924, the International Law Association began work on a uniform contracts conflicts of law code, a project taken over in 1928 by the Hague Conference on Private International Law (hereinafter the "Hague Conference"). A draft code was promulgated in 1931. Nadelmann, supra note 7, at 451. Work on the ULF, supra note 6, began in 1934, with a draft produced in 1936. The history of the ULF roughly parallels that of the ULIS. Farnsworth II, supra note 7, at 227-28.

66. Honnold II, supra note 7, at 327. Twenty-one nations, mostly European, attended the conference. Id.

67. Id.

68. See ULIS Delegation Rep., supra note 7, at 1.

69. See 22 U.S.C. 269(g) (1964).

70. ULIS Delegation Rep., supra note 7, at 1.

71. Honnold II, supra note 7, at 326.

72. ULIS, supra note 6, art. X(1), at 455.

73. Honnold, The Draft Convention on Contracts for the International Sale of Goods: An Overview, 27 Am. J. Comp. L. 22, 224 (1979) [hereinafter cited as Honnold IV]. By 1979, Belgium, the Federal Republic of Germany, Gambia, Israel, Italy, the Netherlands, San Marino, and the United Kingdom (subject to a reservation making ULIS applicable only if the contract expressly invokes ULIS as governing) had ratified ULIS. All but Israel had also ratified ULF, Id. at 224 n.7.

In England, international merchants generally ignore the Convention. Few expressly invoke ULIS in their international sales contracts. Note, Contracts for the International Sale of Goods, supra note 3, at 210 n.8; Comment, A New Uniform Law, supra note 11, at 145-46 (suggesting ULIS similarly is unused in other ratifying states). J.D. Feltham, an English delegate to the CISG Vienna Conference, agrees that there has been minimal use of the ULIS Convention in England. Feltham, The United Nations Convention on Contracts for the International Sale of Goods, 1981 J. Bus. L. 346.

74. ULIS Delegation Rep., supra note 7, at 6. For representative scholarly criticism, see Berman, supra note 3; Nadelmann, supra note 7.

75. J.D. Feltham, an English delegate to the CISG Conference, supra note 73, observes that the ipso factor avoidance provision, ULIS, supra note 6, art. 25, fragmented remedies provisions, Id., arts. 41-49, 61-64, 789-89, the definition of delivery, Id. art. 19, the reference to general principles for interpretation, Id. art. 17, and the usage provisions, Id. art. 9, were among the most controversial aspects of the ULIS Convention. See Feltham, supra note 73, at 347-50. Feltham's observations about the ULIS controversy are very similar to those of the U.S. CISG Delegation. See CISG Delegation Rep., supra note 11, at 8-11.

76. ULIS Delegation Rep., supra note 7, at 7.

77. Honnold II, supra note 7, at 331. The sheer haste and frenzy of the conference allowed insufficient time to consider changes and improvements in the draft. More time was not taken because many delegates believed that the project had already dragged on too long. Id. at 331.

Honnold notes that the drafting of the ULIS can best be described as "glacial," it had required better than three decades to complete. Id. at 326. "The effect produced by this hasty work was . . . disappointing to all. Many delegates used to meticulous legal work were dismayed. . . ."

78. ULIS Delegation Rep., supra note 7, at 7. See also CISG Delegation Rep., supra note 11, at 4-5.

79. ULIS Delegation Rep., supra note 7, at 10.

80. Nineteen of the twenty-eight states represented at the 1964 Hague Conference were from Western Europe. Only three Latin American, African or Asian nations were represented (Columbia, the United Arab Republic and Japan). Among the leading nations involved in trade that were unrepresented were Australia, Canada, China, India and the Soviet Union. CISG Delegation Rep., supra note 11, at 5 n.3.

81. Note, UNCITRAL, supra note 1, at 165; see also Comment, A New Uniform Law, supra note 11, at 134.

82. Comment, A New Uniform Law, supra note 11, at 134. See generally Analysis of Replies and Comments by Governments on the Hague Conventions of 1964, Report of the Secretary-General, [1970] 1 Y.B. U.N.C.I.T.R.A.L.159, 169, U.N. Doc. A/CN.9/Ser.A/1970 [hereinafter cited as Analysis of Replies].

83. ULIS Delegation Rep., supra note 7, at 5-6, 10-11. Many nations also had serious reservations about the trade usage provisions. These concerns ranged from ones similar to those of the American delegation to objections by Third World States that usages favored the more industrialized states. See Analysis of Replies, supra note 82, at 169.

84. ULIS, supra note 6.

85. ULF, supra note 6.

86. ULIS Delegation Rep., supra note 7, at 6; see also supra note 74 and accompanying text.

87. Berman & Kaufman, supra note 3, at 271.

88. ULIS Delegation Rep., supra note 7, at 6.

89. See supra note 77 and accompanying text.

90. Note, UNCITRAL, supra note 1, at 164.

91. Id. at 164-65.

92. Nadelmann, supra note 7, at 459.

93. Id.

94. Id.

95. See supra notes 72-73 and accompanying text.

96. Hungary noted that the Charter called for "the progressive development of international law and its codification" and proposed that "steps be taken for the progressive development in the field of private international law with a particular view to promoting international trade." [1970] 1 Y.B. U.N.C.I.T.R.A.L. 5, U.N. Doc. A/CN.9/SER.A/1970 [hereinafter cited as 1 Y.B. U.N.C.I.T.R.A.L.] See also Farnsworth III, supra note 11, at 315.

97. Farnsworth III, supra note 11, at 322. See also Honnold III, supra note 11, at 5-9.

98. G.A. Res. 2205, reprinted in 1 Y.B. U.N.C.I.T.R.A.L., supra note 96, at 65. the Commission (U.N.C.I.T.R.A.L.) was originally composed of twenty-nine members, Farnsworth III, supra note 11, at 315, but expanded to thirty-six in 1973. See G.A. Res. 3108, reprinted in [1974] 5 Y.B. U.N.C.I.T.R.A.L. 10-12, U.N. Doc. A/CN.9/SER.A/1974 [hereinafter cited as 5 Y.B. U.N.C.I.T.R.A.L.]. The membership of the Commission is allocated by region as follows: Africa, 9 members; Asia, 7; Eastern Europe, 5; Latin America, 6; Western Europe and others (including the United States), 9. Honnold III, supra note 11, at 6. The Commission meets as a whole annually for two to four week sessions. Id.

99. Farnsworth III, supra note 11, at 317, citing 1 Y.B. U.N.C.I.T.R.A.L., supra note 96, at 99-100.

100. Honnold III, supra note 11, at 9.

"The crucial question was this: Would it be possible to obtain widespread adoption of the 1964 Convention? The Commission requested the Secretary-General to transmit to governments the text of the two 1964 conventions and Professor Tunc's commentary, and to ask the governments whether they intended to adhere to these Conventions and the reasons for their position.

"The replies laid the foundation for the Commission's decisions at its second session in 1969. It became evident that the 1964 Conventions, despite the valuable work that they reflected, would not receive adequate adherence. The basic difficulty stemmed from inadequate participation by representatives of different legal backgrounds in the preparation of the 1964 Conventions, despite efforts by UNIDROIT to encourage wider participation, these Conventions were essentially the product of the legal scholarship of Western Europe.

"UNCITRAL thereupon established a Working Group of 14 States -- a cross-section of UNCITRAL's world-wide representation -- and requested the Working Group to prepare a text that would facilitate 'acceptance by countries of different legal, social and economic systems.' Under the effective chairmanship of Professor Jorge Barrera Graf of Mexico, the Working Group completed this task in nine annual sessions." Id.

101. Working Group's Report on its Seventh Session, U.N. Doc. A/CN.9/116, reprinted in [1976] 7 Y.B. U.N.C.I.T.R.A.L. 87, U.N. Doc. A/CN.9/SER.A/1976; E.77.v.1.. The Working Group "Sales" Draft (1976) was reviewed intensively by the Commission in 1976 at its Tenth Session. Working Group's Report on its Tenth Session (U.N.C.I.T.R.A.L. X), U.N. Doc. A/CN.9/128, reprinted in [1977] 8 Y.B. U.N.C.I.T.R.A.L. 25-65 (Annex I), U.N. Doc. A.CN.9/SER.A/1977; E.78.v.7.

102. Working Group's Report on its Ninth Session, U.N. Doc. A/CN.9/142, reprinted in [1978] 9 Y.B. U.N.C.I.T.R.A.L. 83 (W/G 9, Annex), U.N. Doc. A/CN.9/SER.A/1978; E.80.v.8. See also Honnold III, supra note 11, at 41, 9.

103. 1978 Draft Convention on the International Sale of Goods, contained in, U.N.C.I.T.R.A.L. Report on the Eleventh Session, reprinted in, [1978] 9 Y.B. U.N.C.I.T.R.A.L. 14, at para. 28, U.N. Doc.A/CN.9/SER.A/1978; E.80.v.8. See also Honnold III, supra note 11, at 41-42, 9.

104. Text of Draft Convention on Contracts for the International Sale of Goods Approved by the United Nations Commission on International Trade Law Together With a Commentary Prepared by the Secretariat, U.N. Doc. A/CONF.97/5/1979 [hereinafter cited as Draft CISG]. The trade usage provision, article 9 in the earlier drafts of the CISG, became article 8 in the 1978 Draft CISG. Subsequently, in the final CISG, the trade usage provision again became article 9.

The Commentary prepared by the Commission Secretariat is a useful tool for determining the precise meaning of the CISG. While the CISG Commentary probably does not have the persuasive force of the Uniform Commercial Code Commentary, since it applies only to the Draft CISG, the CISG Commentary may still serve as a useful piece of legislative history. For a detailed analysis of the organization and procedures of the Convention, see Honnold III, supra note 11, at 10.

105. CISG Delegation Rep., supra note 11, at 16.

106. See supra note 16 and accompanying text.

107. See supra note 98 for a breakdown of the Commission's membership.

108. Farnsworth I, supra note 7, at 468.

109. Farnsworth III, supra note 11, at 319.

110. Professor Farnsworth observes that Ghana, Hungary, Japan, Mexico, the United States, and the Soviet Union were among the active drafters. Farnsworth I, supra note 7, at 465, 468. Of these, only the United States was involved in the ULIS Conference, and not very effectively. See supra notes 78-82 and accompanying text. With the perspective of a representative of Hungary, one of the more active Socialist members, Eörsi summarizes some of the compromises involved in the CISG negotiations. See id. at 345-56. Date-Bah, Problems of the Unification of Sales Law from the Standpoint of Developing Countries, 7 Dig. Com. L. 39 (1980); Enderlein, Problems of the Unification of Sales Law from the Standpoint of the Socialist Countries, 7 Dig. Com. L. 26. See also Farnsworth, Problems of the Unification of Sales Law from the Standpoint of the Common Law Countries, 7 Dig. Com. L. 3 (1980).

111. Honnold III, supra note 11, at 7.

112. Farnsworth I, supra note 7, at 465-66.

113. Official Records of the United Nations Conference on Contracts for the International Sale of Goods, U.N. Doc. A/CONF.97/19 at XV (1980) [hereinafter cited as Conference on Contracts Record].

114. Eörsi, supra note 11, at 341.

115. Conference on Contracts Record, supra note 113, at 266.

116. Id.

117. The degree to which background material to treaties should be used in interpreting their terms has been somewhat controversial. The Vienna Convention on the Law of Treaties, May 12, 1969, art. 31-32, U.N. Doc. A/CONF.39/27 (1969), 8 I.L.M. 679 (1969), provides for the use of background materials "including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning [derived from the text], or to determine the meaning when [textual interpretation] leaves the meaning ambiguous or obscure; or leads to a result which is manifestly absurd or unreasonable." Id. art. 32.

118. President's Message, supra note 16, at 4. The U.S. view may, with some caution, be taken as representative of that of the developed nations as a whole. To the extent that there are structural or philosophical differences between their views, there is little practical difference in result. See Jokela, supra note 7, at 84-86.

Like the Socialist nations, the developing States tend to view trade usages negatively. See supra text accompanying note 112. For that reason, and because the controversy over usage tended to be a Socialist-Western one, see supra text accompanying note 114, the Developing Nation's view of trade usage, being formulated by the developed states, gives industrial states an unfair advantage. For the comments of an Indian trade law scholar see Kahn, Unification of the Law of International Sale of Goods -- Issues and Importance, in Law of International Trade Transactions 39, 50-53 (R. Kahn ed. 1973). Of course, not all developing nations took such a negative view of usage. For example, the Mexican perspective on article 9 was similar to the United States' perspective. Compare Comments and Proposal of the Representative of Mexico on articles 1-17 of the Revised Text of ULIS, [1975] 6 Y.B. U.N.C.I.T.R.A.L. 76, U.N. Doc. A/CN.9/SER.A/1975 [hereinafter cited as 6 Y.B. U.N.C.I.T.R.A.L.], with the U.S. view, see infra notes 119-34 and accompanying text.

119. See A. Schwartz & R. Scott, Sales Law and the Contracting Process 2-19 (1982).

120. See generally J. White & R. Summers, supra note 54, at 98-104; Dusenberg, General Provisions, Sales, Bulk Transfers and Documents of Title, 28 Bus. Law. 805, 822-24 (1973); Kirst, Usage of Trade and Course of Dealing: Subversion of the UCC Theory, 1077 U. Ill. L.F. 811; Levie, Trade Usage and Custom under the Common Law and the Uniform Commercial Code, 40 N.Y.U.L. Rev. 1101 (1965); The Relevance of Courses of Dealing, Usages and Customs in the Interpretation of International Commercial Contracts, New Directions Int'l Trade Law 109-150, 523-55 (1977). Note, Custom and Trade Usage; Its Application to Commercial Dealings and the Common Law, 55 Colum. L. Rev. 1192 (1955). For a discussion of the common law approach to the role of trade usage in contract interpretation see 3 A. Corbin, Corbin on Contracts 532-60 (1960).

121. U.C.C. 1-201, comment 3.

122. Id. at 1-205(5)-(6), comments 4-10 (proof of a trade usage). See also J. White & R. Summers, supra note 54, at 102-04.

123. U.C.C. 1-205, comment 5.

124. Id. (Emphasis added). In Heggblade-Marguleas-Tenneco, Inc. v. Sunshine Biscuit, Inc., 59 Cal. App. 3d 948, 956-57, 131 Cal. Rptr. 183, 189 (1976), the court held that "persons carrying on a particular trade are deemed to be aware of prominent trade customs applicable to their industry. The knowledge may be actual or constructive, and it is constructive if the custom is of such general and universal application that the party must be presumed to know of it." See also infra notes 125-28 and accompanying text.

125. J. White & R. Summers, supra note 54, at 100. White and Summers note that trade usages can "contradict or supersede the ordinary lay meaning of words used in a agreement. If the parties contract with reference to a trade usage that imports a meaning different from the ordinary lay meaning of words used, so much the worse for the lay meaning. The trade usage will control." Id. Corbin observes that "before a court can give any meaning to the words of a contract and can select one meaning rather than other possible ones . . . extrinsic evidence shall be heard to make the court aware of the 'surrounding circumstances . . . .' " 3 A. Corbin, supra note 120, at 536. See also 9 J. Wigmore, Evidence 2470 (Chadbourn rev. 1981) The treatise law, therefore, would seem to be that trade usage (being a "surrounding circumstance") is always available to determine what the plain meaning of the contract's terms is. See 3 A. Corbin, supra note 120, at 535.

126. Frigaliment Importing Co. v. B.N.S. International Sales Corp., 190 F. Supp. 116 (S.D.N.Y. 1960). See also Ambassador Steel Co. v. Edwald Steel Co., 33 Mich. App. 495, 190 N.W.2d 275 (1971), (where the court held that if a trade usage defined "commercial steel" as containing some set carbon content, that usage was applicable to interpret a contract calling for commercial steel).

127. U.C.C. 1-205, comment 5.

128. For a valuable discussion of this highly controversial issue see Kirst, supra note 174; see also Dusenberg, supra note 120, at 822-24.

129. J. White & R. Summers, supra note 54, at 90-91. On merger clauses see generally id. at 89-95.

130.; Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3, 11 (4th Cir. 1971). See also Modine Manufacturing Co. v. North East Independent School District, 502 S.W. 2d 833 (Tex. Civ. App. 1973). It will be argued hereinafter that this is the superior view. See infra text following note 259.

131. See Division of Triple T. Services, Inc. v. Mobile Oil Corp., 60 Misc. 2d 720, 304 N.Y.S.2d 191 (N.Y. Sup. Ct. 1969); Southern Concrete Services, Inc. v. Mableton Contractors Inc., 407 F. Supp. 581 (N.D. Ga. 1975).

132. In the U.S. view, trade usage can serve either an interpretive or an additive function; trade usage may either interpret the meaning of contract terms or fill gaps in the contract.

133. See CISG Delegation Rep., supra note 11, at 9 (stressing the importance of course of dealing a trade usage in the formation of the contract).

134. See supra text accompanying note 118.

135. See generally Ginsburgs, International Trade Customs, 5 Den. J. Int'l L. & Pol. 325 (1975). Although Professor Ginsburgs is a U.S. citizen, one Soviet commentator has "expressed the view that Mr. Ginsburgs' interpretation of the Soviet treatment of trade customs corresponded to the view of Soviet jurists." Discussion, 5 Den. J. Int'l L. & Pol. 335 (1975). Professor Jakubowski of Poland has observed that "in Polish foreign trade practice, international commercial usages have always had an important place and a broad application. [In Polish arbitral panels] respect for international trade usages is -- as in other arbitration tribunals throughout the world -- very high." Jakubowski, The Relevance of Courses of Dealing, Usages and Customs in the Interpretation of International Commercial Contracts, 2 New Directions 549 (1977).

136. Statement of Mr. Blagojevic, Yugoslvaian Delegate to the Vienna Conference, Conference on Contracts Record, supra note 113 at 263.

137. Statement of Czechoslovakian UNCITRAL representative, Analysis of Replies, supra note 82, at 169. See also Ramzaitsev, The Law Applied by Arbitration Tribunals-I, in The Sources of the Law of International Trade 135, 151 (C. Schmitthoff ed. 1964). Under Polish law usage may displace most legal rules, but not mandatory ones. Jakubowski, supra note 135, at 550.

138. Statement of Soviet Delegate, Analysis of Replies, supra note 82, at 169.

139. Proposal of Czechoslovakian Representative, Conference on Contracts Record, supra note 113, at 73. This proposal was supported by the Soviet and Byelorussian Delegates. Id. at 263-64.

140. Ginsburgs, supra note 135, at 327-38; Jakubowski, supra note 135; at 549; Ramzaitsev, supra note 137, at 151.

141. Jakubowski, supra note 135, at 550; Ramzaitsev, supra note 137, at 151.

142. Ramzaitsev, supra note 137, at 151.

143. Ginsburgs, supra note 135, at 326.

144. The Hungarian and Soviet delegations supported the requirement that the usage be one widely known in international trade. Conference on Contracts Record, supra note 113, at 266. However, the Yugoslavian delegation apparently agreed with the International Chamber of Commerce "that sometimes local usages must be taken into consideration. . . . " Id. at 73.

145. Eörsi, supra note 7, at 342.

146. See Farnsworth I, supra note 7, at 465, quoted supra text accompanying note 112. Professor Eörsi concludes:

"The socialist approach reflect the requirements of a planned economy. The fact that not all socialist countries supported each view can be accounted for by the fact that some were content if their own principles were applied in their domestic trade; so far as their Western trade was concerned they were ready to adjust to Western practice. All the more reason to do so because the trade law among COMECON countries inter se is unified and will remain unaffected by virtue of art. [90] of the Convention." Eörsi, supra note 7, at 341-42.

147. The commentary to Article 8 provided that:

"1. This article describes the extent to which usages and practices between the parties are binding on the parties to the contract.

"2. By the combined effect of paragraphs (1) and (2), usages to which the parties have agreed, are binding on them. The agreement may be express or it may be implied.

"3. In order for there to be an implied agreement that a usage will be binding on the parties, the usage must meet two conditions: it must be one 'of which the parties knew or ought to have known' and it must be one 'which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned.' The trade may be restricted to a certain product, region or set of trading partners.

"4. The determining factor whether a particular usage is to be considered as having been impliedly made applicable to a given contract will often be whether it was 'widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned.' In such a case it may be held that the parties 'ought to have known' of the usage.

"5. Since usages which become binding on the parties do so only because they have been explicitly or implicitly incorporated into the contract, they will be applied rather than conflicting provisions of this Convention on the principle of party autonomy. Therefore, the provision in ULIS article 9, paragraph 2, that in the event of conflict between an applicable usage and the Uniform Law, the usages prevail unless otherwise agreed by the parties, a provision regarded to be in conflict with the constitutional principles of some States and against public policy in others, has been eliminated as unnecessary.

"6. This article does not provide any explicit rule for the interpretation of expressions, provisions or forms of contract which are widely used in international trade and for which the parties have given no interpretation. In some cases such an expression, provisions or form of contract may be considered to be a usage or practice between the parties in which case this article would be applied." Draft CISG, supra note 104, art. 8, comments 1-6 (footnotes omitted).

148. See supra note 147, at comment 5.

149. Comments by Governments and International Organizations on the Draft Convention on the International Sale of Goods, [1977] 8 Y.B. U.N.C.I.T.R.A.L. 109, 113, U.N. Doc. A/CN.9/SER.A/1977 [hereinafter cited as 8 Y.B. U.N.C.I.T.R.A.L.].

150. Id. See also Statement of Yugoslavian delegate, id. at 208.

151. Id. at 121.

152. CISG, supra note 11, art. 4(a).

153. 8 Y.B. U.N.C.I.T.R.A.L., supra note 149, at 129, 136, 139. The Draft Convention on the International Sale of Goods provided no express rule on this issue, but recognized that usage could include definitions of terms. See Draft CISG, supra note 104, art. 8, comment 6.

154. Id. at 89.

155. Id. at 263-64.

156. The Mexican delegate observed that:

"Any specific usage known to the parties should override the Convention because, if the parties decided to conform to a usage, it was because it responded to their needs with respect to a given contract. The problem was slightly more delicate when the usage was not known, but the solution should be the same because knowledge and consequently agreement by parties with regard to that usage was presumed." Id. at 264.

157. See Conference on Contracts Records, supra note 113 and accompanying text.

158. See, e.g., Statement of Yugoslav Delegate, id. at 263. The Socialist states wanted to recognize as reasonable only those "usages established with the consent of all people." Id. This view reflected their belief that usages are monopolistic devices and as such should receive only limited recognition. See supra notes 136-39 and accompanying text.

159. Id. at 262-63.

160. See Conference on Contracts Records, supra note 113, at 263 (statement of Pakistani Delegate).

161. There were no proposals to amend paragraph 1. Conference on Contracts Records, supra note 113, at 236.

162. Id. at 262-69.

163. Id. at 90.

164. CISG, supra note 11, art. 9.

165. ULIS, supra note 6, art. 17. This reliance on general principles was one of the U.S. objections to the ULIS Convention. Comment, A New Uniform Law, supra note 11, at 160.

166. A U.S. attempt to amend article 17 to identify the general objective of the Convention as being unification of international trade law "in the light of international commercial practice" was rejected at the Conference." Comment, A New Uniform Law . . . , supra note 11, at 142.

167. This was in fact at the heart of the U.S. objection to article 17. Id. at 160; see also Kahn, supra note 118, at 50-51.

168. See supra note 73 and accompanying text.

169. Honnold III, supra note 11, at 17.

170. Id. at 18.

171. For an introduction to economic analysis of law see generally C. Goetz, Law and Economics (1984); A. Polinsky, An Introduction to Law and Economics (1983); R. Posner, Economic Analysis of Law (2d ed. 1977).

As a legal theory economic analysis is relatively new. Although there had been some earlier applications of economic principles to specialized areas such as antitrust and trade regulation, the application of economic analysis to a broader range of legal issues can be traced to two seminal law review articles published in 1960 and 1961: Calabresi, Some Thoughts on Risk Distribution and the Law of Torts, 70 Yale L.J. 499 (1961) and Coase, The Problem of Social Cost, 3 J.L. & Econ. 1 (1960) (setting forth the now famous Coase Theorem). In recent years the principles of economic analysis have been applied to virtually every area of law. Posner's text, Economic Analysis of Law, supra, touches on everything from common law rules of property, tort and contract to principles of criminal and constitutional law.

Polinsky has observed that "much of the recent writing by economists about the legal system uses models that are graphical and/or mathematical." A. Polinsky, supra, at xiii. For the sake of clarity this Note, like Polinsky's text, will attempt to "convey the spirit of the economic approach and the insights gained thereby without the technical apparatus." Id. Freed from "forbidding technical jargon [economic analysis can be seen] not as a body of abstract theory but as a practical tool of analysis with a remarkably broad application to the varied problems of the legal system." R. Posner, supra, at xxii.

Efficiency will be used here to mean "exploiting economic resources in such a way that 'value' - human satisfaction as measured by aggregate consumer willingness to pay for goods and services - is maximized." Id. at 10 (emphasis in original). For a more technical set of definitions, see A. Schwartz & R. Scott, supra note 119, at 23-27. Schwartz & Scott offer a useful additional non-technical definition of efficiency "as the allocation of social resources to their highest valued uses at minimum cost." Id. at 24. Of course, cost can be defined to consider not only market costs but also non-market costs such as injury to individuals or the environment. R. Lipsey & P. Steiner, Economics 12 (5th ed. 1978).

For a discussion of some basic principles of economics written for lawyers and law students who are not versed in economics, see R. Posner, supra, at 3-14. On the role of assumptions in economic analysis see A. Polinsky, supra, at 1-4.

172. R. Scott, supra note 24, at 1 [emphasis added].

173. See generally A. Polinsky, supra note 171, at 7-10.

174. R. Lipsey & P. Steiner, supra note 171, at 152. Merchant will be used here to mean an individual, corporation or partnership engaged in the purchase and sale of goods. See Black's Law Dictionary 890 (5th ed. 1981); see also U.C.C. 2-104(1) (1978).

175. The law regulates two types of unfairness in the commercial context: procedural and substantive unfairness. Procedural unfairness arises when the process of making the transaction is unfairly flawed; it is regulated through the laws governing mistake, fraud, undue influence, duress, infancy and insanity. Substantive unfairness occurs when the subject of the transaction violates widely shared moral values and is governed by the laws of illegality and immorality. See Goetz & Scott, Liquidated Damages, supra note 19, at 55 n.11.

176. R. Posner, supra note 171, at 3.

177. See supra text accompanying note 174. Another way of stating this assumption is that commercial parties are assumed to be "efficiency-preferers."

178. On the costs of contracting see Goetz & Scott, Enforcing Promises, supra note 19, at 1271-73 (for purposes of their analysis, they assume bargaining costs are zero). See also A. Polinsky, supra note 171, at 25.

179. Id. See also R. Scott, supra note 24, at 3. Bargaining costs may comprise a significant portion of the cost associated with a transaction. To the extent that bargaining costs are reduced, transaction costs are also reduced, thus increasing profits.

180. Of course, where the gap-fillers do not serve the parties' needs, it is assumed they will draft an explicitly contrary contract clause.

181. See A. Schwartz & R. Scott, supra note 119, at 19-20.

182. See R. Posner, supra note 171, at 3-14.

183. See R. Lipsey & P. Steiner, supra note 174, at 6.

184. In Socialist systems resource allocation decisions are usually made by the government, rather than by market forces. Of course, even in these systems there is still a role for their commercial law in governing the way resources are exchanged. However, the discussion here is mainly applicable to market economies.

185. A. Schwartz & R. Scott, supra note 119, at 28 U.C.C. 1-102(3) provides that:

"The effect of provisions of this Act may be varied by agreement, except as otherwise provided in this Act and except that the obligations of good faith, diligence, reasonableness and care prescribed by this Act may not be disclaimed by agreement but the parties may by agreement determine the standards by which the performance of such obligations is to be measured if such standards are not manifestly unreasonable."

See also 1-102(4).

186. See supra note 171.

187. Coase, supra note 171, at 8. The most important assumption involved is that transaction costs, the costs of negotiation and wealth exchange, are zero. Id. at 2.

188. R. Posner, supra note 171, at 417.

189. Id. at 18-19.

190. See R. Scott, supra note 24, at 18-19.

191. Id. at 19.

192. A. Schwartz & R. Scott, supra note 119, at 28. A related proposition is that the law should resolve disputes between contracting commercial parties as most parties would have had they explicitly bargained over the contingency causing the dispute in advance. Id. at 20. If merchants can expect the law to do so, they need not bargain over every foreseeable contingency.

193. Id. at 18. For a discussion of how the Code facilitates agreement through gap-fillers see generally id. at 63-81. For a non-economic, non-casebook approach to the same provisions see J. White & R. Summers, supra note 54, at 96-146.

194. G. Calabresi, The Costs of Accidents 35-130 (1970).

195. Id.

196. Id.

197. Id.

198. Id.

199. If a trade usage has "such regularity of observance . . . as to justify an expectation that it will be observed with respect to the transaction in question," U.C.C. 1-205(2), it must be "currently observed by the great majority of decent dealers." Id. at comment 5. The usage would be the rule selected if most parties stopped to negotiate over the issue. Compare CISG, supra note 11, art. 9(2). This argument is frequently given to support the liberal use of trade usage. See, e.g. A. Schwartz & R. Scott, supra note 119, at 52.

200. See supra note 24 and accompanying text.

201. See supra notes 118-146 and accompanying text.

202. This may not always be true. For example, Soviet trade customs are poorly collected and not readily accessible. See Ginsburgs, supra note 135, at 335.

203. ULIS, supra note 6, art. 9.

204. See CISG, supra note 11, art. 9.

205. Draft CISG, supra note 104, art. 8 comment 5.

206. See infra notes 208-12 and accompanying text.

207. See supra note 213-24 and accompanying text.

208. See infra notes 233-38 and accompanying text.

209. Karlgren, Usages and Statute Law, 5 Scandinavian Stud. L. 39, 43 (1961). Note that only article 9(2) expressly states that usage override contrary ULIS provisions.

210. See Jokela, supra note 7, at 91. He notes, however, that differing theories about usage may well result in differing interpretations, so that a uniform law which did not admit both approaches might establish a greater degree of uniformity in result. Id.

211. Honnold III, supra note 11, at 114. Such an abnormal usage would be one not "having such regularity of observance . . . as to justify an expectation that it will be observed with respect to the transaction in question." U.C.C. 1-205(2) (1978).

212. See Honnold III, supra note 11, at 114.

213. See supra text accompanying note 84 for text of the paragraph.

214. See supra notes 80-82, 86-88 and accompanying text.

215. For the revised text see Report of the Work of the Second Session, [1971] 2 Y.B. U.N.C.I.T.R.A.L. 50, 58, U.N. Doc. A/CN.9/SER.A/1971 [hereinafter cited as 2 Y.B. U.N.C.I.T.R.A.L.].

216. This indeed was the argument of a Mexican CISG delegate. See Conference on Contracts Records, supra note 113, at 264.

217. See Berman & Kaufman, supra note 3 and text accompanying note 87.

218. Berman & Kaufman, supra note 3, at 271.

219. Wortley, The Relevance of Course of Dealing, Usages and Customs in the Interpretation of International Commercial Contracts, in 1 New Directions in International Trade Law 139, 143 (1977).

220. See, e.g., The T.J. Hooper, 60 F.2d 737 (2d Cir. 1932) (Hand, L.J.) (tort decision).

221. Draft CISG, supra note 104, art. 8, comment 4.

222. See supra notes 149-50, 154-56 and accompanying text.

223. CISG, supra note 11, art. 9(2), reprinted supra in text accompanying note 147.

224. Honnold III, supra note 11, at 117, 119.

225. Wortley, supra note 219, at 142. This concept still has validity in some countries. It was abandoned by the Uniform Commercial Code. See U.C.C. 1-204, comment 5 (1978).

226. Honnold III, supra note 11, at 118.

227. See supra text accompanying note 40.

228. Honnold I, supra note 2, at 82.

229. Jokela, supra note 7, at 89.

230. Id. at 96.

231. See supra text accompanying notes 182-98 for the assumption on which this assertion is based. As noted earlier, merchants frequently adopt arbitration clauses when the courts resist adopting current commercial practice to govern the contract. See supra notes 60-62 and accompanying text.

232. Standard form contract clauses requiring arbitration can always be adopted and probably would not increase significantly the cost of any given transaction. However, not all parties may be willing to accept a given standard form contract. To the extent that the law reduces the need for such clauses there should be some reduction in bargaining costs.

233. Jokela, supra note 7, at 96.

234. Id. at 86.

235. This is typified by the Austrian and Italian Codes, and to a lesser extent by the West German approach. Id. at 85.

236. Id. See also Karlgren, supra note 209, at 42.

237. Karlgren, supra note 209, at 43-45.

238. Honnold III, supra note 11, at 114, reprinted supra in text accompanying note 147.

239. Analysis, supra note 82, at 169.

240. Jokela, supra note 7, at 94.

241. Conference on Contracts Records, supra note 113, at 89. (rejected by a vote of 25-9).

242. Id. at 266.

243. See Statements of the Australian, Hungarian and Norwegian Delegates. Id.

244. Draft CISG, supra note 104, art. 2, comment 1, at 56.

245. See CISG, supra note 11, art. 9(2), at 674.

246. See supra note 147.

247. Honnold III, supra note 11, at 121. As to the degree of "internationality" required of the usage, Honnold comments:

"Must the usage be 'international?' This question can lead to confusion, but the Convention clarifies the issue. Under article 9(2) the usage must be one which 'in international trade is widely known to, and regularly observed by parties to' such transactions. A usage that is of local origin (the local practices for packing copra or jute, or the delivery dates imposed by arctic climate) may be applicable if it is 'widely known to, and regularly observed by' parties to international transactions involving these situations. Id. (emphasis omitted).

248. Conference on Contracts Records, supra note 113, at 89.

249. Id. (vote of 21-16).

250. CISG Delegation Rep., supra note 11, at 8.

251. Honnold III, supra note 11, at 122.

252. Draft CISG, supra note 150, art. 8, comment 6 (emphasis added).

253. CISG, supra note 11, art. 8(3), at 673.

254. See Draft CISG, supra note 104, art. 7, comment 1.

255. Honnold III, supra note 11, at 120 (footnote omitted). But see id. at 115.

256. Draft CISG, supra note 104, art. 8, comment 5.

257. See id. (the provision was believed to conflict with the constitutional principles and the public policy of some states, but the present principle of party autonomy has made it unnecessary).

258. President's Message, supra note 16, at 5. See also Honnold III, supra note 11, at 122. This interpretation is supported by the fact that although paragraph 3 of the ULIS version of article 9 was not carried over into the CISG version, the CISG Drafting Party felt that CISG article 6 made paragraph 3 unnecessary, as usage is part of the parties' agreement. Report of the Working Group on the International Sale of Goods on the Work of its Sixth Session, 6 Y.B. U.N.C.I.T.R.A.L., supra note 118, at 53.

259. See supra text accompanying note 156.

260. Winship, supra note 9, at 1234.

261. See supra notes 26-35 and accompanying text.

262. See supra notes 3-5, 49-64 and accompanying text.

263. There are a variety of other competing factors in the decision making process. Among these would be nationalism, as opposed to internationalism, national prestige or other foreign policy goals, and a commitment to the idea of world order through the growth of law. Some of these concerns may reflect political considerations like those discussed in supra notes 107-46 and accompanying text. Fortunately, the actual or impending ratification of CISG by several Socialist states, see supra note 15, seems to indicate that a commercial law acceptable to differing social, political and economic systems is possible in practice as well as in theory.

264. Hill, The Impact of Trade Usage on Commercial Agency at Common Law, 2 New Directions, supra note 120, at 523.

265. This is not to say that all of article 9 is inefficient. However, the ULIS trade usage provisions as a whole are not efficient.

266. Berman, supra note 3, at 361-62.

267. See Dore & DeFranco, supra note 11, at 67; Feltham, supra note 73, at 361 (although he goes on to ask whether the CISG text is an improvement "from the point of view of the individual interest of the United Kingdom with its developed common law in commercial matters. . . "), and Ryan, Australia and a Uniform Law of International Sales, in International Trade Law of International Sales in International Trade Law Meeting 199, 221 (1977) (discussing the Draft CISG).

268. See supra text accompanying notes 266-67.

269. See Dore & DeFranco, supra note 11, at 567-59; Note, UNCITRAL, supra note 1, at 173-74.

270. See supra note 263.


Pace Law School Institute of International Commercial Law - Last updated February 28, 2001
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