Saggi, Conferenze e Seminari 2. Reproduced with permission of Centro di studi e ricerche di diritto comparator e straniero, diretto da M.J. Bonell
Roma (May 1997)
I. This essay considers some implications of the likelihood that change and revision in commercial and contract law to meet new market circumstances will continue at a high rate for a substantial time in the future. These processes of revision and reconsideration of the law will involve legal communities around the world in a complex process of lawmaking and will present important challenges that deserve our attention now.
When we think of lawmaking, particularly the articulation of a basic body of private law, we are likely to expect it to be an unusual event. Once the structure of such a body of law has been well-framed, the construction need not be repaired for generations, or even centuries. Like the ancient stones of the glorious buildings of Rome, the great codes of the past appear stable over time, requiring only minor repairs and adjustments from time to time to reflect changes in society and its values.
Today I would like to discuss briefly some implications of a legislative process that departs from this historical expectation. The process of revising contract and commercial law is becoming an almost continual response to rapidly and radically changing technology and world markets. Markets are expanding and changing shape; the technology of trade changes even faster. The political dimensions of this economic change are profound. Europe is becoming a Union, Asia grows at a dizzying pace, the Americas are in the process of forming what may become the largest market of all. Familiar legal regimes no longer reflect commercial realities.
The basic facts from which our discussion must proceed are outside the law. The roots of the rapid change we are experiencing are in [page 1] technological and economic developments that go back 500 years. These developments have increased in momentum and intensity over the past century, but they are not novel in essence. Changes in communications technology have helped produce economic markets that expand to cross borders, have become regional, and rapidly are becoming global. These inexorable economic facts have been the driving force behind legal changes throughout the world that have harmonized, and often unified, what had been idiosyncratic local and national commercial law. There is no need to discuss this situation in great detail, for it is familiar to us all. My point is that we lawyers did not decide it would be nice to have a new set of laws. Instead, we are driven into the process of change by the economic and technological forces that shape transactions.
The process of change has proven more complex than might have been anticipated even a few years ago. For example, who could have foreseen the impact of the development of computer-based banking systems? During the 1920's it seemed that the best approach to harmonization of sales law would be to design a distinct legal code for international transactions that could operate alongside national codes and laws. International transactions then appeared to be a small, isolated category, distinct from more important domestic economic transactions, and calling for unique legal rules.
It took a very long time, more than 50 years, to carry that strategy to full fruition in the United Nations Convention on Contracts for the International Sale of Goods (UNCISG). That task is now complete and the UNCISG has been acceded to by most major trading nations around the globe. Without criticizing the UNCISG, it must be observed that few experts anywhere would claim that the UNCISG represents a complete and workable resolution of all of today's problems. Yet neither the UNCISG itself, nor the UNCITRAL organization that brought it to completion provides any effective process for ongoing revision and expansion.
Other strategies for dealing with the need to harmonize commercial law have been adopted along side the UNCISG. In Europe, the [page 2] UNCISG has been supplemented by the Rome Convention on Contractual Choice of Law. This Convention pursues a different strategy, one that seeks to clarify the legal setting for international transactions by providing rules for choosing among competing national substantive laws. This strategy may be contrasted to the UNCISG, which insists that international transactions are different, with their own special rules. In the Americas, the Organization of American States has recently proposed a Convention very similar to the Rome Convention for Inter-American use.
In addition, under the leadership of Michael Joachim Bonell and others, UNIDROIT has now promulgated an excellent set of General Principles for International Commercial Contracts that expands, interprets, and supplements the UNCISG in important ways.
These examples can be multiplied several-fold. Private rules developed by such groups as the International Chamber of Commerce (ICC) are generally recognized as sources of guidance for documentary credits and trade terms in an electronic world. The ICC rules have developed in an institutional structure that has done an excellent job of keeping these rules up to date and reflecting technological changes rapidly in revised rules that appear as often as every five years.
Moreover, most nations recognize that these economic and technological changes have not been limited to international markets. The same changes affect domestic transactions and demand a more rapid cycle of revision of national and local laws.
The pace of change shows few signs of slowing. Yesterday's radical reform of the law quickly begins to look obsolescent. In short, we confront not the need for a single event of reform, but must deal with a multi-leveled, continuing process. Most importantly, it is becoming [page 3] increasingly apparent that each of the legal vehicles I mentioned have proven useful to deal with different facets of the situation. It is no longer a matter of making an alternative choice between the Vienna Convention (UNCISG) and the Rome Convention on choice of law, or the UNIDROIT Principles. We need them all.
Fortunately, it is becoming obvious that, by and large, the various projects fit together well. They usually supplement and complement each other and do not often contradict each other in substantive outcomes. One can foresee a day when all of these approaches to harmonization will coalesce into a single coherent structure, but there are few reasons for anticipating that day will dawn soon. During our lifetime, surely, that day is unlikely to come. The complexity of the present situation will continue and multiple paths of harmonization and reform will have to be followed at the same time.
II. These general thoughts lead me to today's topic, which is the current experience in the United States with a major effort to improve and update the Uniform Commercial Code (UCC), which in effect, is the law of all 50 states, and in its present form is only a generation old. The UCC has already proven of great worth in harmonizing the law of the fifty states on commercial matters.
American experience with UCC revision is indicative of problems that commercial nations around the world, and the increasingly important transnational legal regimes, will have to deal with in the years ahead.
a. What is the UCC and how did it come about?
For the first 150 years of the United States, commercial law occupied a rather uncomfortable place in the American constitutional scheme. Contract and commercial law then was largely judge-made, common law, not statutory or codified law. For reasons that have more to do with American federal politics than any clear theoretical reasons, legal [page 4] responses to the industrial and transportation revolutions of the 19th century were dealt with predominantly at the state level. The Constitution gives Congress jurisdiction over interstate and international commerce, but the pattern was established that most commercial law rules were predominantly part of state law, although the role of national law vastly expanded in other aspects of economic affairs during the Roosevelt New Deal. When the need to harmonize the law of sales and other commercial subjects was recognized late in the 19th Century, therefore, the effort was to reform and coordinate state law on these subjects.
One major vehicle for this effort was an organization known as the National Commissioners on Uniform State Laws, a group dominated by lawyers who represented banks and other commercial interests, and representatives of state governments. During the first several decades of the Twentieth Century, with strong support from the legal profession and the help of such outstanding scholars as Professor Samuel Williston, the Commissioners adopted and urged on the states a number of uniform laws on sales, documents of title, negotiable instruments, and the like. These uniform statutes were very influential in reducing the differences between the laws of the states. Legal and commercial interests saw their aims as parallel and mutually supportive. Many state legislatures were willing to agree to adopt this legislation. A similar organization, the American Law Institute, was created at about the same time as the National Commissioners on Uniform State Laws with the aim of reconciling and improving the body of judge-made common law on such topics as contract.
By the period immediately before the Second World War, it was becoming clear that some of the older uniform laws needed to be brought up to date and that the connections among the uniform acts needed to be more coherent. The National Commissioners joined forces with the American Law Institute and with foundation and bank financial support to undertake to draft a revised Sales Act that soon was described as a Commercial Code. It is difficult to overstate the influence of several scholars, particularly Professor Karl Llewellyn in this project. By the [page 5] early 1950's a Uniform Commercial Code was drafted and adopted by the National Commissioners. It had eight substantive chapters or articles dealing with Sale of Goods, Negotiable Instruments, Bank Credits, Letters of Credit, Documents of Title, Bulk Sales and Security Interests.
The next task was to persuade the states to adopt the Code. The early efforts were very difficult and slow. The state legislatures simply were not able to consider a document as complex as the Code. These are not subjects on which the average state legislator was expert. Few states in those days had professional legislative staffs able to undertake such a study. One big step forward occurred when New York State appropriated a sum of money to study the UCC that was larger than the sum that had supported the entire drafting project that produced the Code. The New York study and the California one that followed a few years later were monumental efforts, reexamining every provision of the Code. The California effort was led by two of my colleagues at UCLA Law School, William Warren and Robert Jordan.
Needless to say, these critical examinations produced literally hundreds of recommendations for modifications in the Codes. The National Commissioners responded very positively by incorporating many of the modifications and promulgating a new version of the Code. Of central importance to today's topic, a Permanent Editorial Board for the Code was created within the National Commissioners and the American Law Institute to treat proposals to improve the Code as an ongoing effort. Within five years of the New York adoption of the Code most of the 50 states had fallen in line. Those states that had adopted the original version of the Code readopted the new one. Today all states have adopted the Uniform Commercial Code. It has been a great success in creating a basic framework for law throughout the nation.
The title Uniform Commercial Code is somewhat misleading. Different parts of the Code have different legal styles, but most of the document would not be recognized by a European as a Code, and rare is the American court decision that uses a code approach to interpreting and filling in the law. Along the same lines, the definition of "Commercial" [page 6] is doubtful. Many aspects of commercial law, forms of business association, and bankruptcy, for instance, are outside the scope of the Code. There may be some doubt whether the UCC is either commercial or a code, but it is certain that it is not uniform. Many state legislatures have respected the basic demand of uniformity, but in hundreds of provisions major states have departed from the uniform text, often in minor ways that escape attention from even a careful law professor for years. Many of these variations are of little or no significance, some are potentially more troubling. But they are there. I mention this because I do not think that these variations are as big a problem as purists might think. A limited degree of variation has not interfered with essential uniformity. Sometimes it merely provides the occasion for judicial interpretation which concludes that the variant text in substance means what the uniform text says.
b. The Current Revision Project
When it was adopted in the 1960's, the UCC seemed a progressive, if not a radical document. It brought with it basic changes to the law of every state. In most cases these changes have worked out very well indeed. Over the years, however, there has been a growing need to revise various articles of the UCC to reflect the kinds of technological changes mentioned at the beginning of this paper. A rolling process of revision updates and usually improves troubling parts of the Code. Most of the issues are correctly viewed as technical, with the desire to maintain basic uniformity outweighing passions for one or another rule.
The Article on Sale of Goods needed to be expanded by a parallel Article on commercial leasing of goods and soon will be supplemented by an Article on the sale or licensing of intellectual property. The Articles on negotiable instruments, letters of credit, and bank credits, have required substantial rewriting to reflect the tremendous changes in banking brought on by the electronic age. In recent years every single Article of the Code has undergone revision. Some of these revised Articles have already been sent on to the states for adoption, some are still being [page 7] debated. A good friend who is active in this process tells me that right now the law of the states is anything but uniform as some states have adopted the new version, others prefer the old version, and others have made modifications in the uniform text. My friend predicts that it will be the second decade of the next century before there is any realistic hope of bringing this process to a point of pause. Certainly the new millennium will have begun before the National Commissioners adopt complete drafts on all parts of the Code.
c. Technical Issues, Political Issues and Ideological Issues
Some experts may disagree with the last paragraph. My pessimism is based on my sense that the process of revision is becoming more complicated and difficult to bring to a prompt conclusion. Inevitably, there are political and ideological dimensions to any important legislation. One purpose of my attempt to recount the history of the National Commissioners is to emphasize that it was always the bankers and the industrial interests who supported and promoted harmonization of this body of law. The ordinary person has a stake in the economy, but the specifics of the rules are not of concern to most persons.
In recent years there have been complaints regarding the process that both the National Commissioners and the ALI follow. It is said that they have become private legislatures, with the effective power to control the substance of the law, but lacking political legitimacy. These critics, who include some leading academics and the dean of at least one major law school, claim that the process has been dominated by interest groups that hire professional and academics representatives to serve as lobbyists, employed to articulate the views of special interest groups in the law revision process. It is said that on occasion the legislative process has [page 8] been captured by these interest groups and the results have not been in the broader public interest. The political dimensions of the process becomes central for these critics as the subject matter becomes increasingly technical and complex.
Complex laws are difficult to comprehend at best. The revision process suffers as complex provisions become battlefields on which each little hill and valley must be fought over. The only way out of such a situation is a negotiated peace, in which both rationality and political legitimacy are likely to suffer. The revision process used by the Uniform Commissioners and the American Law Institute is based on the assumption that experts can be objective, surmount personal professional interests, and put aside the influences that would distort their judgment. From their beginnings, these institutions have depended heavily on the voluntary participation and support of talented generalists, academics and judges who contribute selflessly and thoughtfully to the project. In reality it is difficult to lay aside the particular monetary interests of paying clients. Yet few practicing lawyers become expert in a highly technical field or are in a position to form a sound judgment regarding them unless they have clients who create such distorting interests. Academics and judges may operate from a more detached perspective, but many professors also advise clients on a regular basis and a judge's expertise will grow rusty when the issues are technical and arise only infrequently in litigation.
I stand at the edge of this process and my limited observation of how it works leaves me somewhat ambivalent. I have been a member of the ALI for at least 25 years and serve on several of the member's consultative committees that review the drafts of the UCC. While I have tried to review the drafts carefully, my other duties preclude me from actively participating in the project by attending all of the meetings. In this respect, I believe I am typical of the membership. Most of the people in the room at any meeting are there for a reason. [page 9]
It may be that a few persons wandered into the meeting because it is raining or cold outside and they prefer to be dry and warm. A few may be consumed by a platonic interest in the subject or suffer from a rare mental illness that leads them to prefer attending a drafting committee meeting rather than joining their family by the seashore or the mountains. Nevertheless, most of the practitioners and academics at such meetings are there because they are being paid directly or indirectly for their attendance by someone who wants their views represented. I do not see this as a grave fault so long as no one is excluded from the process and the rules of the institution ensure that its decisions are based on a serious examination of the merits and with openness to the values of others.
I recall such a meeting I attended in San Francisco a few years ago on the topic of letters of credit. Arrayed around the table were 80-100 practitioners and professors, most of whom represented one segment or another of the banking world. They sat together in groups that revealed their allegiances. Although I had been teaching about letters of credit for more than twenty years, I had never fully appreciated the diversity in the interests of different kinds of banks on technical questions of letter of credit law. I had not realized there were so many kinds of banks and beneficiaries. The debate was spirited, but a talented chairman made everyone aware of the larger values involved and particularly the desirability of reaching an agreement that all could accept. After a full debate, decisions were made and my impression was that everyone was confident of the quality of the process and soundness of its conclusions. If the questions are technical, only an expert can hope to participate in their resolution. If the process is inclusive, we can be confident that all interests are represented and that strong values will be respected in the outcome.
At the other extreme, some doctrinal issues are understood to embody values and principles reflecting commitments more profound than those aroused by the practicalities of efficient bank operation. When [page 10] these less technical issues are studied it will be harder to reach an agreement, for it is always hard to compromise or remain dispassionate about values.
An example comes to mind from the work of the group revising Article Two of the UCC on Sales. The original version of the Article is a great triumph, the work of Professor Karl Llewellyn and essentially unrevised for a generation. Only a very brave revisor would approach a legal treasure like this with editor's scissors in hand. Yet the Article also contains some very difficult sections that obviously need revision or clarification in light of experience. Several of these questions do not have the technical quality I attributed to the Letter of Credit Article. For this presentation, I will mention just one: the drafting committee's proposal to abolish the general requirement of a writing in contracts for the sale of goods of a value in excess of $500, a requirement American lawyers usually refer to as The Statute of Frauds. The abolition of the writing requirement would, of course, bring the UCC in line with the law in most of the world, including most of the English-speaking world. It would also bring our domestic law in line with the national rules that apply in international sales under the UNCISG. It has proven difficult to gain agreement on this question, which involves an almost 300 year old law that every American lawyer learns during the early months of legal education. Without questioning the sincerity of the opponents, who include representatives of major manufacturing interests, it seems that the requirement of a writing has become a symbol for certain attitudes toward contractual obligation that some have placed in a Pantheon of sacred principles that must be kept safe from reexamination forever. However this matter is ultimately resolved, I cite it as an example of a doctrinal issue that is hard to resolve because of its secondary meanings that are understood by some to embody important values. It is emblematic of the kinds of difficulties that can be anticipated on a global basis as revision projects attempt to deal with concepts that have taken on similar secondary significance in national codes. [page 11]
Perhaps most troubling, and bringing this discussion around to full circle, is the temptation to make the UCC a complete statement of all of its complex subject matter. The existing UCC makes some strange choices on what it includes and excludes. For example, the sale of goods is covered, but other sales (licensing of intellectual property, for example) have been excluded. Leases of goods also were excluded until a new article was added a few years ago to include them. Transactions that include the sale of goods and services have always been troublesome for the UCC. In a way, this sort of issue is reminiscent of the troubles UNCISG had in defining the types of sales it covers. The point is that while lines ultimately are likely to be arbitrary, we still need lines. To include everything in one code complicates the task impossibly.
As an example of this difficulty with the insistence on completeness, consider the puzzling choices regarding provisions that define the jurisdictional scope of the UCC, that is the definition of the transactions to which a particular state's law applies and the resolution of potential conflicts with the laws of other jurisdictions. The UCC has had little to say about choice of law and about its own jurisdictional sweep. In the general provisions of Article One are found several broad and general statements of a few sentences in length on these subjects. A drafting committee has been established to consider several problems in Article One, including these issues, and it seems to be making progress. I recently reviewed a preliminary draft on the subject. What caught my eye was not the substance of the draft, but how the text has grown in length. I must confess that I was one of those who wrote to the drafting committee at an earlier stage of the process and urged that the matter be clarified. Now I appreciate the limited usefulness of my advice, for instead of a brief but cryptic sentence, we now are presented with a detailed and complex minicode on choice of law that is three pages long! I do not blame the committee and I am sure that some of this difficulty will be resolved with a sharp editorial pencil later in the drafting process. Nonetheless, the experience leaves me less sure how to resolve the matter of [page 12] providing a complete set of basic rules in the Code, while leaving the complex choice of law rules for another place.
I have attempted today to share some experiences in the ongoing revision of a commercial code in a rapidly changing market. I remain hopeful that this difficult, ongoing process of revision will produce a better UCC. I also hope that the process of revision will be improved in response to the critics. I know that the National Commissioners and the ALI are both sensitive to these matters.
It is simply not possible to just leave the technical matters of revision exclusively to the technicians. The process of revision will demand a structure in the future quite different from the one we have become used to. In this area as in others, the challenge of democratic accountability is not resolved simply because the legislators at the end of the process are elected by the people. Experts who also serve as hired guns must be watched, and representation in the process must be broad and inclusive.
This is likely to prove difficult and will certainly lengthen and complicate an already overly long process. Moreover, increased emphasis on full debate strengthens the hands of those who would obstruct all change and would prefer the law to remain just as it is. I have read with great interest the growing literature on these issues in American scholarly journals. In general, I applaud the dedicated groups of experts who [page 13] participate in this process. At the same time, I recognize the dangers are not abstract. I think there have been instances of abuse in the process.
III. In conclusion, I want to turn back from the American experience to the international situation, for the same concerns will be presented. The UNCISG and other basic legislation soon will need revision. The groups that produce these documents have tended to be defined by a small group of academic experts and governmental representatives. Some groups (UNIDROIT comes to mind in this respect) have been remarkably open and solicitous of a range of perspectives on their work. I think this may be one reason among many others why the UNIDROIT Principles that have emerged are such a well-crafted and well received document. The creation of democratic ways to legislate on technical questions is a challenge around the world and is presented in every field of law. The rapid pace of change and the need for repeated cycles of reform of commercial law make this challenge especially urgent. Together we shall proceed with the task of harmonizing and improving commercial law based on our common experience.
Thank you. [page 14]
1. The European Convention on the Law Applicable to Contractual Obligations (1980) (The "Rome Convention").
2. Organization of American States, Inter-American Convention on The Law Applicable to International Contracts, approved March 17, 1994 at the Fifty Inter-American Specialized Conference on Private International Law (The "Mexico City Convention").
3. Alan Schwartz and Robert E. Scott, The Political Economy of Private Legislatures, 143 U. Pa. L. Rev. 595 (1995). An excellent and exhaustive symposium on the topic with contributions written by a broad range of knowledgeable observers is found in two issues of the Loyola of Los Angeles Law Review. Symposium: Is the UCC Dead, or Alive and Well? 28 Loyola of L.A. L. Rev. 89-400 (1994) and 26 Loyola of L.A. L. Rev. 535-822 (1993). Kathleen Patchel, Interest Group Politics, Federalism, and the Uniform Law Process: Some Lessons From the Uniform Commercial Code, 78 Minn. L. Rev. 83-164 (1993).
4. At this particular meeting I do not recall any judges participating.
5. In 1995 the President of the American Law Institute appointed a distinguished committee to consider these issues. In December 1996 the Council of the Institute adopted the following new rule:
9.04 Members' Obligation to Exercise Independent Judgment. To maintain the Institute's reputation for thoughtful, disinterested analysis of legal issues, members are expected to leave client interests at the door. Members should speak and vote on the basis of their personal and professional convictions and experience without regard to client interests or self-interest. It is improper under Institute principles for a member to represent a client in Institute proceedings. If, in the consideration of Institute work, a member's statements can be properly assessed only if the client interests of the member or the member's firm are known, the member should make appropriate disclosure, but need not identify clients.
In a recent letter to the membership the President recognizes that the new rule does not address every situation and may need to be supplemented. Charles Alan Wright, The President's Letter, in The ALI Reporter, Winter 1997.